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.
“Enforcement of a universal charge structure based on a percentage of funds under management could have serious consequences particularly for this sector of the market, which relies on combination charges to make their pension model viable, making it more difficult to support certain employers to comply with their auto-enrolment obligations.”
Michael Ambery, partner at Hymans Robertson, sounded a similar note.
He warned that the new structure “may impact providers both in terms of ability to adopt this approach, impact the business plans and profitability of providers, and also may not increase engagement for members who arguably do not understand the charges and scheme costs that apply to their pensions”.
However, he noted that if implemented, the universal charging structure “would enable greater and hopefully more consistent understanding [by members].
“Certainly it would enable comparison by members based on charges alone. Charges do not always represent value offered by a particular provider.”
Problems ahead?
Darren Philp, director of policy at Smart Pension, branded the DWP’s new call for evidence “premature”.
"While there is a debate to be had about how pensions are charged for, this needs to be considered in the round. We need to move away from constant piecemeal changes, which continually adds complexity,” he said.
Philp argued that moving to AMC-only pricing “will cause instability to exactly those schemes that have done all the heavy lifting in making auto-enrolment such a success”.
“All the main auto enrolment providers charge on a dual basis, which recognises the economics of running these schemes,” he said.
“We don’t want to go back to the bad old days where some providers just cherrypicked the profitable business. We should stop, pause and think, and let the market mature so all schemes are sustainable over the longer term.”
He suggested that the government should “fully understand” the “huge market distortion it would be creating it if implemented these changes in the near term, including for its own scheme, Nest”.
Smith also highlighted problems the change could pose to Nest.
“In the case of Nest, the combination charge of 1.8 per cent on each new contribution and a 0.3 per cent AMC was designed to help the scheme pay back its government loan more quickly, and moving to a universal charge might make this much more challenging,” she explained.
A Nest spokesperson said that the master trust “will be looking to work closely with the DWP through the consultation”.
Benjamin Mercer is a reporter at FTAdviser's sister publication Pensions Expert
