Pensions red tape risks trapping tens of thousands of pension savers in low returning funds, according to consultants LCP.
The problem concerns savers in workplace pensions who have actively chosen to invest part, or all of their pension in property funds, in search of higher returns.
Many of these funds have been gated as a result of the coronavirus crisis, amid concerns about liquidity and falling values in this sector.
In response, new contributions are being diverted, generally into low-risk, low-return cash investments as a short-term measure. However, according LCP, there is a risk that money may continue to flow into these low-return funds even once the crisis is past.
The issue is that when property funds re-open, the schemes will have to make a decision about what to do with future contributions if the member expresses no active preference.
If the scheme decides that the member ‘would have wanted’ the money to go into the property fund, and they redirect new contributions into these funds, there is a legal risk that this could also be treated as a ‘default fund’ – as this now becomes another fund into which new contributions are directed without further action by the member.
However under AE regulations defaults funds have to meet a 0.75 per cent charge cap, and many property funds will have far higher fees.
To avoid being in breach of these rules,, it is understood that some schemes are considering simply leaving member money going into low-risk, but low-return cash funds for the long-term, leaving it to members to make their own decisions.
This could seriously damage the long-term prospects of savers, especially younger members who have a long time to retirement.
LCP Partner and head of DC, Laura Myers, is calling on the government to clarify the rules so that members do not suffer in the long-run.
Myers says: “Where members have actively chosen to invest in property, they have been willing to face higher charges in the hope of securing better returns.
“It would be perverse if this was now regarded as a default arrangement and further, in breach of the charge cap. It would be even more perverse if the result was that member funds continue to be invested in an overly cautious way, which is likely to produce a lower pension pot at retirement.
“TPR’s guidance on this does not go far enough and leaves the issue open to legal interpretation and unfortunately worse outcomes for members. We urgently need clarity from government and the Pensions Regulator so that members do not lose out.”