The Department for Work and Pensions is to ban the charging of flat fees on pension pots under £100 in an attempt to stop their erosion by charges and administration costs.
The government announced the move today (January 13) following a review but it stopped short of altering the charge cap, which will remain at 0.75 per cent; though transaction costs are not to be included.
The government said members in the qualifying schemes included in its pension charges survey were already below the cap with an average charge of 0.48 per cent.
The government first proposed the ban on flat fees in June 2020 in response to industry concern about the deleterious effects flat fees and admin costs have on small pots.
Their depletion by charges and administrative fees has long been a serious problem for members, who can in some cases see their pensions eroded entirely over the course of their careers, at a cost to the individual of hundreds of pounds of savings.
Pensions minister Guy Opperman said: “Whilst automatic enrolment has been a huge success, some people, particularly those on the lowest incomes, are changing jobs more frequently, with a resulting increase in the number of deferred small pension pots.”
“I am committed to limiting the erosion of the value of small pots, where flat fee charges risk depleting deferred pots to zero. Nobody should be automatically enrolled, only to find their hard-earned pension savings significantly reduced by charges.
“Therefore, I will be introducing a minimum level initially set at £100, before a flat fee element of a charging structure can be applied to these pots. I will keep the amount of the minimum level under review with a view to raising it at some stage in the future."
The Pensions Regulator welcomed the move. David Fairs, executive director of regulatory policy, analysis and advice, said: “All defined contribution pension savers deserve to be in a well-run scheme that offers value for members.
“We support the Department of Work and Pensions’ plans to introduce a limit on pension pots below which flat fee charges cannot be levied.
“This proposal will help reduce the erosion of members’ pensions by fees and, along with wider action recommended by the Small Pots Working Group, protect the benefits of savers with small pots."
Industry figures also welcomed the ban but cautioned it was not a long-term solution for all problems.
Steven Cameron, pensions director at Aegon, said: “Banning flat fees whenever an individual’s fund is under £100 will help. But longer term, it would be far better to find ways of making sure small ‘frozen’ pots left behind when changing jobs are joined up with the individual’s other pensions.”
Now Pensions is thought to be one of the master trusts that could be forced into changing its fee structure as a result of the consultation.
As reported by FTAdviser's sister publication Pensions Expert in June, Now Pensions charges £1.50 a month as an admin fee in addition to a 0.3 per cent annual management charge.
When asked whether Now Pensions would be changing its fee structure, Adrian Boulding, director of policy at Now Pensions, said: “The next step is a government consultation which will start in the next few weeks and run for a couple of months, so until government conclude that we can't make decisions.
“We will then need to give employers six months notice of any changes."
Pension contributions plunge
Meanwhile, Covid has caused contributions to DC schemes to fall by 11 per cent between Q1 2020 (January to March) and Q2 (April to June), while employer contributions were down by 5 per cent.
During the coronavirus crisis there were concerns that savers would opt out of their workplace pensions in search for extra cash, but the pandemic had less of an impact than expected as numbers held steady.
The data, published this morning (January 13), showed there were 23m DC members by the end of June 2020, the same number as at the end of March, compared with 22.4m at the end of September 2019.
The Office for National Statistics said this “may be because of the impact of the coronavirus pandemic on the labour market, but caution is advised in interpreting the results.”
Tom Selby, senior analyst at AJ Bell, said the data begins to show the impact Covid-19 has had on people saving for retirement.
Mr Selby said: “This drop in contributions likely reflects the impact of furloughing, with total auto-enrolment contributions based on 80 per cent of salary for millions of people. Some workers will also inevitably have opted out due to pressure on their incomes caused by the pandemic.
Meanwhile, Alistair McQueen, head of savings & retirement at Aviva, warned many could face a worse retirement if these trends continue.
Mr McQueen said: “Furlough, however, has brought with a drop in incomes for millions. This has resulted in an alarming 11 per cent drop in total private sector occupational defined contributions by employees, from £1.76bn in Q1 to £1.56bn in Q2 2020.
“This will mean a poorer retirement for many. The longer this drop persists, the greater retirement impact will be."
amy.austin@ft.com, benjamin.mercer@ft.com
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