Flat fees on workplace pensions will be banned for sub £100 pots under a government review that could see a single charge structure become law.
The Department for Work and Pensions (DWP) has today published a consultation on new rules that would outlaw flat fee structures which are currently used by a small number of pension providers. Smart Pension recently changing its charging structure from a flat 0.75 per cent AMC model to a combination charge structure, with a 0.3 per cent AMC plus a monthly member charge of £1.25. a combination charge structure is also used by Now: Pensions, which charges a 0.3 per cent AMC plus a £1.50 monthly member charge, and Options with a 0.5 per cent AMC and a £1.50 monthly member charge. Creative charges a 0.4 per cent AMC plus £2 per active member per month. Deferred members pay £1.20 per month subject to a £50 minimum fund value. The People’s Pension charges a 0.5 per cent AMC plus a £2.50 annual member charge, but discounts its AMC when savers’ pots get larger.
The DWP says it wants to promote comparability in charges between providers so consumers can better understand whether they are getting value for money from their workplace pension scheme.
But providers affected by the change say the consultation’s proposals risk hitting those schemes that have done the heavy lifting in ensuring auto-enrolment is a success.
The government is also considering rationalising the current three permitted charging structures within the default fund arrangement, down to a single charging structure. This single permitted charging structure would allow charging of a single percentage annual management charge, based on the value of the member’s pot within the default fund, meaning the combination charge operated by providers such as Nest would no longer be permitted.
The DWP says a universal charging structure will be to enable better member comprehension of the charges they pay, and of their pension’s other features, and in doing so, improve member engagement. This in turn may enable members to compare pensions, and exercise choice where they feel an alternative pension product could more closely meets their needs, it says.
The DWP says it is concerned at the risk that varied charging structures act as a barrier to members’ better understanding and ability to compare the costs of their pension with other pension products and schemes.
The consultation will also ask whether employers who are choosing a pension scheme routinely negotiate the level of their own charges with the provider, and if so what impact may this have on the employee’s contributions.
Pensions minister Guy Opperman MP says: “We know that for some, particularly those that regularly undertake short-term employment and change jobs frequently, there is a greater likelihood that they will be automatically enrolled into new workplace pensions a number of times. It is this group we are seeking to help by the measures set out in this consultation.
“We know that pension providers must be able to charge members for the services they provide, and this measure will only apply to pensions schemes which use a flat fee combination charge, and will only be applicable to pots valued at £100 or less. Providers using this type of charge may continue to charge members the percentage charge element, as is the case now.
“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.
“I know, however, that the lowest price product may not necessarily always be the best one for the member. It may not deliver the required retirement income they need, or it may not fulfil other preferences, perhaps including how, or in what types of pension product, their money is invested.”
Smart Pension director of policy Darren Philp says: “It is important that pension costs and charges are transparent and understandable for members and the industry has come a long way in improving transparency in recent years. But this call for evidence into standardising charges is 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. Moving to AMC only pricing at this stage will cause instability to exactly those schemes that have done 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. We don’t want to go back to the bad old days where some providers just cherry picked the profitable business. We should stop, pause and think, and let the market mature so all schemes are sustainable over the longer term.
“We think more still needs to be done to improve and assess value, but the government needs to fully understand the huge market distortion it would be creating if it implemented these changes in the near term, including for its own scheme, Nest. Workplace pensions have never delivered as much value for money as they do now, and looking to change the fundamental basis of the market at this point in time risks the progress we have made over the past ten or so years.”
AJ Bell senior analyst Tom Selby says: “The last thing the Government needs is for automatic enrolment, a policy that has enjoyed incredible success and cross-party support, to be associated with ‘rip-off’ headlines.
“By banning flat fees on small pots worth £100 or less from April 2022, the pensions minister is taking swift action to protect not only people’s pensions, but the reputation of the Government’s flagship reform programme.
“It is positive that a simple £100 cut-off has been proposed, rather than the ‘tiered’ approach which could have become horribly complicated.
“Having moved to address this value for money issue, focus will inevitably turn to the Prime Minister’s promise to address the ‘net pay anomaly’ which means over a million low paid employees miss out on tax relief each year.”
Phil Brown, director of policy at B&CE, provider of The People’s Pension, says: “We welcome the confirmation that the DWP is proposing to set the charge cap de minimis for cash charges at £100. Advanced notice that this was the likely threshold has allowed us to plan to comply with this change before it becomes mandatory next Spring.
“DWP and the regulators have a packed agenda, including dashboards, regulatory fees, simplified annual statements, small pots, the retirement journey, value for money and now the future of pricing. Many of these issues are interrelated and should not be treated in isolation; pricing isn’t just about transparency, it should be about fairness for members as well.”
Aegon head of pensions Kate Smith says: “Introducing a single universal charging structure for default funds will make it easier for savers to compare charges across their pensions schemes. Due to auto-enrolment and a fluid workplace market, people tend to have several pension schemes, and it may be difficult for them to compare their pensions charges, if one or more of their schemes use combination charges. The reality is 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 itmore difficult to support certain employers to comply with their auto-enrolment obligations.
“In the case of Nest, the combination charge of 1.8 per cent on each new contribution and a 0.3 per cent annual management charges, 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.”