The 0.75 per cent charge cap on auto-enrolment pension schemes is working ‘broadly as intended’ and will not be changed, the Government has confirmed.
In a written statement today, the Minister of Pensions and Financial Inclusion, Guy Opperman, confirmed that following a review of the recent Pension Charges Surve, which took data relating to over 14m pension savers, there will be no change to the 0.75 per cent charge cap on default funds in automatic enrolment schemes. The Government will review the charge cap in 2020.
Royal London director of policy Steve Webb says: “This is a welcome and balanced decision by the DWP. The charge cap was only introduced a few years ago and sought to strike a balance between protecting members against excessive charges whilst allowing for diversity amongst pension providers and avoiding a ‘race to the bottom’. In practice, many millions of workers already face charges well below the charge cap, and automatic enrolment remains a hugely attractive way of saving for retirement. With employee contributions benefiting from tax relief and often matched by employer contributions, the current system is providing good value for money for the vast majority of pensions savers.
“We also support calls for greater transparency and consistency over disclosure of transaction costs. It would be premature to expand the scope of the charge cap to include such costs when their nature and level is still not clear. We urgently need the adoption of simple and consistent measures of transaction costs so that trustees and governance committees can make sure that providers are providing value for money to scheme members.”
AJ Bell senior analyst Tom Selby says: “While policymakers have decided the 0.75 per cent price ceiling established in 2015 remains appropriate for now, this may just be a stay of execution and the Government believes there will be a ‘much clearer case for change’ in 2020.
“What this change will look like remains to be seen. If the Government decides to lower the cap it will presumably do so in a way that ensures Nest, the scheme established by the state to support auto-enrolment, isn’t caught out. It would certainly be no surprise to see the Government push for a 0.5 per cent charge cap ahead of the scheduled 2022 general election to show that it remains on the side of hard-working savers.
“Policymakers may also want to expand the scope of the cap by including transaction costs. At the time of the original charge cap consultation the industry successfully lobbied against the incorporation of transaction costs, with industry figures arguing they are unavoidable.
“It also remains unclear how transaction costs, which are inherently unknown, would be quantified for the purposes of a cap, and the Government would have to be careful not to dissuade fund managers from making trades in members’ interests for fear of breaching the cap. However, work is ongoing to improve disclosure of transaction costs and this will inevitable hold huge sway in informing any decision in relation to the cap.”
Aegon pensions director Steven Cameron says: “Reducing the charge cap would lead to providers reviewing schemes and potentially turning some away as they may not be able to afford to continue to service them. It would reduce employers’ choice forcing many into NEST which has a charging structure that can actually be higher for those with modest pension savings. A reduction in the cap would have been a major own goal for the DWP and in many cases bad news for members.”
WRITTEN ANSWER IN FULL
The Government has now completed the examination of the cap that applies to member-borne charges in default investment funds within defined contribution (DC) pension schemes used for automatic enrolment (AE).
After seeking a range of industry and consumer views and considering the findings of the recent Pension Charges Survey, which captures data from providers covering 14.4 million scheme members, we do not feel that now is the right time to change the level or scope of the cap.
The cap is working broadly as intended, helping to drive down member-borne costs, whilst allowing flexibility to allow asset diversity or tailored services for members and employers. It appears some small schemes are less able to take advantage of the most competitive market rates, and we have launched proposals to simplify the scheme consolidation process. This will allow smaller schemes who cannot secure value for money in the long term to exit the market and secure a better deal for their members elsewhere.
There continues to be a lack of transparency on transaction costs, which is hindering trustees and Independent Governance Committees’ (IGC) attempts to monitor and evaluate whether these represent value. We believe that it is vital to get disclosure right before deciding on whether a cap on transaction costs is appropriate. Recently announced DWP legislative proposals will ensure trustees have sight of these costs and can give that information to members. The FCA is developing similar rules for providers.
The Government remains committed to ensuring AE members are protected from unreasonable and unfair charges, and recognises that there is on-going concern amongst consumers.
We will actively monitor the situation, by reviewing the information which trustees of DC schemes will be required to publish from April 2018, and which providers will publish in due course, to monitor whether the downward trend in charges is continuing.
That will also inform our next review. In 2020 we intend to examine the level and scope of the charge cap, as well as permitted charging structures, to see whether a change is needed to protect members. This will also allow us to evaluate the effects of the next stage of AE and the new master trust and transaction costs regimes.
Whilst we are not pre-judging the decision, we expect there to be a much clearer case for change in 2020.
