The Work and Pensions select committee has called for a charge cap to be set on investment pathways from the outset.
In its report on pension costs and transparency, published today (August 5), the MPs called on the Financial Conduct Authority (FCA) to set a 0.75 per cent charge cap despite the regulator stating it would be a challenge to impose a cap from day one.
The FCA has previously said that it would prefer to see how the market develops and then do a one year review after investment pathways are introduced to see whether a charge cap is needed.
But the MPs said setting a cap now would send a clear message to the industry.
The report stated: “The FCA told us that it would prefer to see if market-consistent tools work and, if those fail, introduce a charge cap.
“This conversation is a near repeat of those our predecessor committee had with the FCA about schemes used for automatic enrolment savings, which are now the subject of a charge cap.
“The FCA would send a simpler message to the industry by setting a charge cap now for investment pathways— rather than issuing vague threats to the industry.”
Since 2015 providers have had to cap the charges within default accumulation funds to 0.75 per cent per year of funds under management however there is no such cap for decumulation products.
Earlier this year, in February, Pritheeva Rasaratnam, head of pensions and funds policy at the regulator, told the Work and Pensions select committee it would be a challenge to impose such a cap from day one but the regulator had not dismissed the idea.
She said: "This a market that doesn’t exist yet, and there is a real danger if you introduced a cap at the wrong level, there could be unintended consequences.
"We want to see how the market develops, where the charges are lying, and we will do a review one year after investment pathways come in, and we will be looking very carefully at charges at that stage.
"A cap isn’t out of the question at that stage."
Andrew Bailey, the FCA’s chief executive, said: "Our general approach towards capping is that it is a tool that is in the box, but we use it when more market consistent tools aren’t working and a market is failing."
In June, pensions minister Guy Opperman showed his support for a charge cap but said it was too early to decide what level it should be set at.
In a letter to Labour MP Angela Eagle, published June 18, Guy Opperman said: “To cap now would be premature - otherwise we risk setting a cap too high which is ineffective, or too low which excessively limits choice.”
Tom McPhail, head of policy at Hargreaves Lansdown has warned that a charge cap may pass on risk to consumers.
He said: "A charge cap of 0.75 per cent on retirement pathways is superficially attractive but risks storing up significant risks of consumer detriment.
"Drawdown investors have to be protected from investment and financial planning risks whose potential impact on their financial well-being far outweigh the difference of a few basis points in charges.
"They need active management to protect them through fluctuating market conditions and they need good tools and guidance to help them plan their income withdrawal strategies.
"Get these wrong and no charge cap in the world will protect them."
But, Gregg McClymont, the director of policy at The People’s Pension, welcomed the idea of a charge cap.
He said: “There is no reason why vanilla decumulation products – like the pathways - should cost more than accumulation products."
But he cautioned: "While the pathways fix issues in the sale of non-advised flexi access drawdown, we don’t see them as a model for fixing the at retirement market.
"That’s going to require a better understanding of savers' needs and further innovation to build ‘whole of life’ pension products."
The FCA published the final 77-page policy statement of its Retirement Outcomes Review last month (July 30) in which it confirmed rules requiring drawdown providers to offer non-advised consumers a choice of four investment pathways.
The FCA proposed the pathways after it found many consumers were solely focused on taking tax-free cash from their pensions and were "insufficiently engaged" with deciding how to invest funds that moved into drawdown.
The regulator said it expects providers to issue warnings to consumers who decide to invest in cash, as well as those already in cash when the final rules come into force.
Pension providers will also have to give consumers in decumulation information on the costs and charges they have paid on their pension pot on an annual basis, to be communicated in a single pounds and pence figure.
Providers will have 12 months to implement the changes, despite respondent providers claiming such a timeline would be "challenging" as a result of IT and system changes and suggesting an 18 month implementation period instead.
amy.austin@ft.com
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