The DWP has committed to banning flat fee charges on certain workplace pensions worth less than £100 from April next year.
The government has announced regulations that will implement a de minimis on the charging of flat fees as part of a combination charge beginning in April 2022, ensuring that a member’s pension savings of £100 or less will be protected from flat fee charges. This comes following the Permitted Charges and Defined Contribution Pension Scheme consultation, which was launched in May to gather views on the matter.
The DWP opted not to implement a universal charging structure for DC pension schemes following industry feedback. It was agreed that comparing costs and charges among different pension schemes is difficult but that there may be alternatives to a universal charging structure to this problem. The change will prevent the erosion of small pots with combination charges of less than £100 by flat fees.
Aegon Pensions Director Steven Cameron says: “The Government’s decision to ban flat fees being deducted from auto-enrolment pension pots of under £100 to avoid them being wiped out is understandable. However, a pot of £100 will make no difference to income in retirement, and even if it could be annuitised, would generate only a few pence per month. With this in mind, we see these changes as more of a symbolic gesture than a genuine means of improving retirement outcomes. The decision means that those firms who have offered this choice of charging to employers, in return for a lower fund based charge, will now need to update systems and communications ahead of the April 2022 introduction. This will take resources away from many other more important developments such as preparing for pension dashboards. Bearing in mind flat fees where they exist are typically small, the monetary impact on individuals of a year’s delay would also have been very small.
“We’re pleased however that the Government is not rushing into universal pension charging across all auto-enrolment pensions. There’s a real risk doing so will cause serious damage to the pensions market, which is currently vibrant and competitive offering a range of propositions and employer choice with bespoke charging. Universal pension charging could encourage a race to the bottom in terms of charges and ‘vanilla’ pension propositions as innovation will be discouraged and competition stifled, potentially filtering down to poorer member outcomes.”
Interactive Investor head of pensions and savings Becky O’Connor says: “Preserving small pots against erosion below £100 from flat fees will prevent the disappointment of a workplace pension falling in value to £0. However, even with this ban in place, it is still possible for the value to be eroded to just £100, which won’t go very far in retirement.
“Anyone worried about small pension pots being eroded by charges who has a number of them from old jobs could consider bringing them together in one place. This also has the advantage of making it less likely that you will forget about old, low-value pensions from the past and therefore less likely that any will be eroded to such low levels.
“It’s disappointing not to see more at this stage from the DWP on what a fair charging system for pensions looks like. It is vital that pension costs and charges are better understood and more comparable for scheme members as fees can make a big difference to retirement outcomes. At the moment, millions of workers paying into a workplace pension are completely in the dark about whether they are getting good value.
“A more transparent and comparable charging structure could finally bring fees into the spotlight and enable people to make better informed decisions about which provider should look after their money.”