No change to pension fund charge cap after government review

Out-Law News | 19 Jan 2021 | 1:01 pm | 2 min. read

The UK’s Department for Work and Pensions (DWP) has confirmed there will be no change to the 0.75% charge cap for defined contribution (DC) occupational pension schemes.

In the government response to a call for evidence on the review of the default fund charge cap and standardised cost disclosure, the DWP said the DC market was working competitively and member-borne charges were generally well within the cap.

It also acknowledged the importance of headroom in the charge cap, to help manage the challenges of unforeseen events such as Covid-19.

The Pension Charges Survey 2020 found all members in the schemes covered by the research were below the cap of 0.75% of a savers’ fund, and the average charge of 0.48% is significantly below the cap.

The government also said it had no plans to bring transaction costs within the charge cap, due to the difficulties in predicting such costs and concerns about unduly constraining managers.

Pensions law expert Tom Barton of Pinsent Masons, the law firm behind Out-Law, said the decision would provide certainty for those managing DC schemes.

“This means that workplace occupational pension schemes can continue much as they are from a legislative point of view – but will need to continue to focus on value generally and deepening their understanding of transaction costs. The main benefit is that investment innovation is not stifled by cost controls, and this ties in with the DWP’s associated measures for performance fees in relation to illiquid assets,” Barton said.

The review also looked at the introduction of costs transparency initiative (CTI) templates in 2019. It found support for a standardised cost reporting process to ensure transparency and consistency in the reporting of costs and charges to trustees, but noted that take-up of the CTI templates was not universal.

The government said ensuring trustees had the right information available was an essential component of value for money, and it would consider legislating on this matter in due course, if take-up was insufficient.

“This creates a time-limited opportunity for industry to adopt a system that works and meets policy objectives, in order to spare the possibly heavier burden of legislative requirements,” Barton said.

The review also examined the impact of fees on small pension pots, noting that there was a significant risk of erosion of pot value where schemes use a flat-fee charge. There was also a disproportionate cost to providers for administering small pension pots.

The government said it would set a minimum pot size of £100, under which flat fees cannot be charged. The limit will be applied to the default funds of schemes used for automatic enrolment, although percentage charges as part of a combination charge could still be applied.

The DWP’s Small Pots Working Group reported in December 2020 that dashboards, consolidator schemes, member exchange and pot-follows-member variants may have a role to play.

“From a policy point of view, it’s clear that the current priority is to retain small pots within the pensions system – and to protect its value from erosion by charges. Longer term, we expect that the issue will find a practical resolution through dashboard and consolidation by way of bulk transfers into very large authorised master trusts,” Barton said.

“In the meantime, we need workable solutions that don’t create an administration and cost burden which is disproportionate to the sums at stake. With this in mind, releasing micro pots from the pensions system seems very logical – since these are unlikely to ever make a material difference to a saver’s retirement outcome,” Barton said.