Fees  

DWP launches review of pension charge cap

DWP launches review of pension charge cap

The Department for Work and Pensions has launched a review of the default fund charge cap and standardised cost disclosure amid concerns lower earners are not adequately protected.

The review, launched today (June 25), is asking if the current 0.75 per cent cap for defined contribution default funds should be lowered or if transaction charges should be included under the cap.

The DWP is also proposing changes for flat fees – which some master trust apply in combination with an annual management charge under the cap - for administration purposes, though not an outright ban.

Government officials stated “the flat fee structure in its present form does not provide adequate protection, particularly for low earners and other groups who have traditionally been excluded from pension saving”.

The problem with the flat fee structure - which was raised by the Work and Pensions select committee in February 2019 – is that individuals who are with a scheme for a short period of time could end up paying a higher charge, as the fee is levied on the pot each month irrespective of whether contributions continue to be paid.

“Many of these savers could have the balance left in the fund charged out to zero before they reach retirement, even with a reliable annual investment return,” the DWP stated.

Even if limited to dormant pots, it could “eliminate competition and push charges upwards, whilst restricting choice for employers,” which “could lead to poorer retirement outcomes for scheme members,” it added.

On the other hand, a flat fee can be beneficial for savers with bigger pension pots, which is why the government is not considering a complete ban of this charge.

To prevent small pots from being eroded to zero, the government is considering measures which will set a minimum pension pot size before a flat fee can be charged.

As an example, providers will only be able to charge a £5 fee or less to savers with pots above £100, a fee of more than £5 but equal to or less than £10 to individuals with savings above £200, and so on.

However, the government still has a number of questions about how any such mechanism might apply – such as if it should apply to all members or just the ones who are deferred, if there are any issues that would make it difficult to introduce such a limit, among others.

“We will work with stakeholders on the detailed application of any measures taken forward following this call for evidence,” it stated.

maria.espadinha@ft.com

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