The Department for Work and Pensions is considering to introduce a universal charging structure, in the form of a percentage fee charged annually, for default funds in defined contribution schemes.
The proposal is one of a number contained in a consultation, published yesterday (May 24), which followed another published in January in which the decision was taken to ban the charging of flat fees on pots under £100.
The purpose of a universal charging structure for DC default funds would be to help people understand their charges better and improve member engagement, the government said.
It stated: “This in turn may enable members to compare pensions and exercise choice where they feel an alternative pension product could more closely meet their needs.”
There are currently three permitted charging structures:
- a single percentage charge of the pot value, taken at the end of each year and capped at 0.75 per cent of funds under management;
- a combination of a percentage charged on each new contribution made, plus an annual percentage of funds under management charge; and
- a combination of a monthly or annual flat fee plus an annual percentage of funds under management charge.
The consultation proposed whittling this down to a single, universal charging structure allowing for a single percentage annual management charge based on the value of the member’s pot within the default fund.
Although the move was welcomed for the clarity it might give to DC savers, experts have warned of the problems it would cause for master trusts as it outlaws combination charging.
The document acknowledged that the proposal would “inevitably impact” providers who currently use alternative structures, and pledged to consider “carefully” any impact on existing or potential members.
In his foreword, Guy Opperman, minister for pensions and financial inclusion, wrote: “We said that in 2021 we would look at how we could make it as easy as possible for pension savers to have access to comprehensive and transparent information on costs and charges.
“I believe that moving, in the future, to a single, universal charging structure could make a significant difference to the transparency of charges, make comparison easier, and unlock greater choice for members.”
‘Serious consequences’ for master trusts
Opperman wrote that the changes proposed in the consultation were designed to protect those who work several short-term jobs and often find themselves auto-enrolled into new pension schemes, not least by providing them clarity on how all their small pots are charged.
Clare Reilly, chief engagement officer at PensionBee, heralded the proposal to do away with combination charges.
“No reasonable person is able to understand or compare the jambalaya of combination charges across auto-enrolment schemes. The only way to offer comparability, transparency, and real engagement with pensions is standardisation of a single percentage AMC across all types of pots,” she said.
“At PensionBee, we’ve long called for the abolition of combination charges — charges that at best confuse savers, at worst erase their savings to zero. A single fee charging structure gives customers clarity, confidence and control in their understanding of how our service and, indeed, all pensions should work.”
Kate Smith, head of pensions at Aegon, agreed in principle but said that “only a minority of pension schemes use combination charges, and these are largely master trusts aimed at the mass auto-enrolment market, with Nest being the prime example.