The Department for Work and Pensions is weighing up replacing the three allowed charging structures for default funds with a single structure. This would permit a single percentage annual management charge, based on the value of the member’s pot within the default fund.
In November 2021, the DWP put its plans for a universal flat rate charge on hold, as part of a consultation seeking to shield DC members “from high and unfair charges and from the risk of erosion to their pension savings from such fees”.
While acknowledging the flexibility that the different structures currently provide, the government said that charges across automatic enrolment products are “less transparent than they could be”, which makes it harder for members to compare charges across pension products.
At the end of last year, the government also started consulting on whether to exclude investment performance fees from the charge cap.
A universal structure could distort the market
B&CE, the provider of The People’s Pension, cautioned that a flat fee structure solely for auto-enrolment pension providers could distort the market, disadvantage auto-enrolment savers, and prompt an increase in charges from pension providers.
It currently uses a combination charging structure, which would be banned under the DWP’s proposals.
Under its current structure, B&CE said that the average earner with The People’s Pension could see their lifetime annual management charge eventually fall by more than half to just 0.23 per cent.
In contrast, the provider warned that flat fees could see this earner miss out on almost £27,000. A ban on combination charges would render B&CE unable to offer its rebate to its members, which currently gives back members between 0.1 per cent on savings of more than £3,000 and 0.3 per cent on savings above £50,000.
“We believe that banning combination charging structures like ours would be a backwards step as it will remove incentives for saving more towards retirement and will unfairly target savers in workplace pension schemes,” said Patrick Heath-Lay, chief executive of B&CE.
Fees for small pots are set to be banned
The DWP launched its consultation on flat fees and structures last year, moving to ban flat fees for pots under £100 and considering more broadly the structure of charges allowed within the charge cap.
Regulations for the £100 threshold were laid before parliament last month, with the ban expected to come into force in April 2022.
The government has accepted that moving to a universal charging structure would hurt some providers that use alternative structures. In particular, it has acknowledged the financial impact upon the master trust industry, which it said is not due to break even until 2025.
Kate Smith, head of pensions at provider Aegon — which also operates a master trust — echoed The People’s Pension’s sentiments.
“This is the wrong time to move to universal pension charging,” she said. “Doing so could do serious damage to the pensions market, which is currently vibrant and competitive offering a range of propositions and employer choice with bespoke charging.”
Smith warned that universal charging could encourage a race to the bottom on charges and even force some schemes to wind up.
Former pensions minister and LCP partner Sir Steve Webb warned that for the master trusts populated by millions of members with small pension pots, the revenue from a fixed percentage charge may not cover their costs.
“The DWP should prioritise resolving the ‘small pots’ issue first, and it would then have a much stronger case for standardising charging structures,” he said.
A DWP spokesperson said: “We are considering the views expressed in the universal charging structure element of the permitted charges consultation responses, and other evidence and will respond formally in due course.”
Alex Janiaud is deputy editor at FTAdviser's sister publication Pensions Expert
