Pension default fund charge cap sticks at 0.75%

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.

A reduction in the cap would have been a major own goal for the DWP and in many cases bad news for members.Steven Cameron

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”.

He said: “The charge cap was only introduced a few years ago, and sought to strike a balance between protecting members against excessive charges, whilst allowing for diversity amongst pension providers and avoiding a ‘race to the bottom’.

“In practice, many millions of workers already face charges well below the charge cap, and automatic enrolment remains a hugely attractive way of saving for retirement.”

Sir Steve argues that with employee contributions benefiting from tax relief and often matched by employer contributions, “the current system is providing good value for money for the vast majority of pensions savers”.

He also agrees that it would be premature to expand the scope of the charge cap to include transaction costs, since more transparency is needed.

He said: “We urgently need the adoption of simple and consistent measures of transaction costs so that trustees and governance committees can make sure that providers are providing value for money to scheme members.”

Steven Cameron, pensions director at Aegon, said: “The DWP has made the right decision in not reducing the auto-enrolment charge cap at this time.

"Many employers with large, stable workforces with high contribution levels will have secured terms well below the 0.75 per cent cap. But smaller schemes with high staff turnover and lower contributions cost more to run.

“Reducing the charge cap would lead to providers reviewing schemes and potentially turning some away as they may not be able to afford to continue to service them.

"It would reduce employers’ choice forcing many into Nest, which has a charging structure that can actually be higher for those with modest pension savings. A reduction in the cap would have been a major own goal for the DWP and in many cases bad news for members.”

maria.espadinha@ft.com