PensionsOct 17 2014

DWP reveals scrutiny of pension transaction costs

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Transaction costs, which are excluded from the occupational pension scheme charge cap of 0.75 per cent, are set to fall under further scrutiny with trustees assessing whether they provide good value for money, the Department for Work and Pensions has revealed.

In a ‘command paper’ published today (17 October), the DWP said it will press ahead with the 0.75 per cent cap on charges to invest and manage the default funds of all qualifying schemes from April 2015.

It will also bring forward further rules to ensure members will not be charged consultancy fees for advice to their employer, while from April 2016 savers in all types of scheme will no longer be charged commission or consultancy fees.

While the document stops short of making it mandatory to reveal transaction costs, trustees will have to calculate the charges and transactions costs where they have access to this information, which members are paying to access, and whether they provide good value to them.

Furthermore, the annual trustee chairman’s statement should contain:

• the charge levels and the trustee’s assessment of the value delivered by these;

• the levels of transaction costs – where trustees have been able to access this information – and their assessment of the value delivered by these; and

• details of any information about transaction costs which trustees have been unable to obtain and an explanation of the steps being taken to obtain that information in future.

Lydia Fearn, head of DC investment consulting at Barclays Corporate and Employer Solutions, stated that the firm was encouraged by a number of the greater scrutiny on transaction costs.

“However, we are more cautious about any further downward pressure on the charges cap on default funds as focus will shift to achieving the lowest cost as opposed to the best outcome for members.

“For those thinking about retiring in or shortly after April 2015, the tight timescales and a lack of detail to date for individuals and employers means there may not be enough time for this group to plan sufficiently.”

Earlier in the year, a number of providers expressed concern over the possible introduction by the government of transaction costs within the pension scheme charge cap, warning it would have a negative impact on the services provided to members.

In addition, Tom McPhail, head of pensions research at Hargreaves Lansdown, pointed out that the proposed ‘defined ambition’ pensions which will not be subject to the charge cap as they involve some level of guarantee.

“The cost of these guarantees can be very high, typically around 1 per cent for a fund with a capital guarantee, and members will still have to pay fund management and administration costs on top.

“So in spite of the new charge cap, some scheme members could end up unwittingly paying total costs of as much as 2 per cent a year.”

The draft regulations are now open for consultation, closing on 14 November.

peter.walker@ft.com