Implementing a charging cap on drawdown schemes would be a challenge due to the lack of default funds used in the product, according to industry experts spoken to by FTAdviser. ,
A new consultation by the Labour party published yesterday (24 November) proposed capping charges for drawdown products ahead of new freedoms which are already prompting a surge in sales of the product.
As data continues to show more mainstream consumers are buying this complex product, Labour stated that existing options are very expensive and can suffer from poor investment strategy and governance.
Speaking to FTAdviser, Ros Altmann, pensions consultant and expert, said: “A drawdown cap should be higher than the 0.75 per cent cap on an accumulation fund because there’s more work to do.
“In an accumulation fund money should be going in all the time whereas in a drawdown fund money is going in and out. We can’t expect people to manage pension funds for free - they have to make a return and also make sure they offer good value and it is what the customer wants.”
However, Andrew Tully, pensions technical director at MGM Advantage cited “practical issues” with imposing any firm cap, in particular due a lack of default fund options,
He said: “The problem is exactly how you implement it. There’s no such things as a default fund in drawdown... it would come with the added complexity of whether or not you need to build a default fund for drawdown.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, broadly agreed, saying while he understands the thinking behind the cap he too has concerns.
“There are some challenges around it right now. I can see where they are coming from and I get the idea about reassuring investors that they can get a fairly priced deal. Putting a cap on could stifle innovation and it would fail to address the annuity market.”
Referencing the need for a default solution, Mr McPhail suggested a cap would need to operate in a similar way to auto-enrolment, with providers required to offer a “packaged solution” which fits within a given price cap.
Martin Tilley, director of technical services at Dentons, did not agree that imposing a cap would be a good idea.
“Labour has this good idea of capping everything without understanding the value of things. Just because it’s cheap doesn’t mean its good.
“It all comes down to: how small a drawdown contract is... is it appropriate to run with all these flexibilities.”
The Labour-backed review of retirement income also questioned whether institutional standards, in terms of charges, governance and design, should be brought to the retail space.
It asked for responses as to what a typical total expense ratio for a default drawdown product provided by a large-scale master trust could be, and how this would compare with individual drawdown products sold in the retail market.
ruth.gillbe@ft.com
