Pension default fund charge cap sticks at 0.75%

Pension default fund charge cap sticks at 0.75%

The government won’t be making changes to the 0.75 per cent charge cap in defined contribution (DC) workplace pensions used for auto-enrolment.

In a written statement issued today (16 November), the minister of pensions and financial inclusion, Guy Opperman, said the cap is “working broadly as intended, helping to drive down member-borne costs, while allowing flexibility to allow asset diversity or tailored services for members and employers”.

Since 2015, providers have to cap the charges within default funds to 0.75 per cent per year of funds under management.

The Department for Work & Pensions (DWP) conducted a review of this cap, alongside a wider assessment of auto-enrolment, which is due to be published next month.

After seeking a range of industry and consumer views and considering the findings of the recent pension charges survey, which captures data from providers covering 14.4 million scheme members, the government concluded now is not the right time to change the level or scope of the cap.

Mr Opperman said: “It appears some small schemes are less able to take advantage of the most competitive market rates, and we have launched proposals to simplify the scheme consolidation process.”

He is referring to draft legislation published last month on defined contribution pension scheme bulk transfers, which will be made easier from April 2018. 

He said: “This will allow smaller schemes who cannot secure value for money in the long term to exit the market and secure a better deal for their members elsewhere.”

However, Mr Opperman argued that “there continues to be a lack of transparency on transaction costs, which is hindering trustees and independent governance committees’ (IGC) attempts to monitor and evaluate whether these represent value”.

He said: “We believe that it is vital to get disclosure right before deciding on whether a cap on transaction costs is appropriate.”

To tackle this matter, the DWP announced last month that workplace pension savers will be able to compare pension charges online from April 2018, as the disclosure of this information from managers and trustees is to be made mandatory.

The Financial Conduct Authority (FCA) is developing similar rules for providers, Mr Opperman added.

The government will analyse this issue again in 2020, when it intends “to examine the level and scope of the charge cap, as well as permitted charging structures, to see whether a change is needed to protect members,” Mr Opperman explained.

He said: “This will also allow us to evaluate the effects of the next stage of auto-enrolment and the new master trust and transaction costs regimes.

“Whilst we are not pre-judging the decision, we expect there to be a much clearer case for change in 2020.”

According to Sir Steve Webb, director of policy at Royal London, the decision to leave the default fund charge cap at 0.75 per cent is “a welcome and balanced decision by the DWP”.