The Department of Work and Pensions is set to publish a consultation document next month on whether costs and charges should be included on members’ annual benefit statement.
Speaking at the Corporate Adviser Summit, David Farrar, senior policy manager at the DWP, said these costs should be presented in a simplified ‘pounds and pence’ form.
He said that DWP would propose that this should include transaction costs, but would listen to views from the industry on this issue as part of the consultation process.
Farrar said: “At the moment members have to hunt out this information online. This can be a complicated process, which does not seem appropriate for those that have been automatically enrolled into these investment products.”
Farrar stressed that the timing of this consultation paper could be affected by external parliamentary considerations, such as a general election and Brexit.
Farrar said that this consultation paper could be followed in the new year, by further consultations, on both the charge cap, and the use of CTI templates to disclose charges in the asset management sector.
He says that the later would help “flush out” asset managers that were resistant to using these templates — which are currently voluntary — to present more a more detailed breakdown of charges to trustees.
Farrar says that the charge cap review was expected in early 2020. This would look at a range of factors, including whether there is sufficient headroom within the current 0.75 per cent cap for schemes to diversify into more illiquid assets, such as infrastructure and private equity.
However, while there has been political pressure for pension scheme to diversify, Farrar sounded a word of caution pointing out that “illiquid” does not necessarily equate to “good” investments. While he says that diversification clearly offers benefits it will be up to trustees to decide how schemes achieve this, this will not be mandated by government.
Farrar says that the DC pension market had gone through a period of extensive consolidation in recent years, but from a policy point of view, this had not gone far enough.
He pointed out that nine years ago the largest 150 schemes accounted for 51 per cent of the DC market. Today these biggest 150 schemes now represent 95 per cent of the market, in terms of member numbers.
However he points out that there is a “long tail” of smaller schemes which have fewer than 1,000 members. While this now accounts for just 0.2 per cent of the market (down from 4 per cent nine years ago) Farrar says that DWP policy would drive further consolidation at this end of the market.
He said that evidence showed that there was a correlation between the size of a scheme and the value for money delivered to members, in terms of charges, governance and investment performance.
Farrar added that while in theory there was no reason why small schemes could deliver effective governance, in practice finding well run small schemes with fewer than 100 members was “like hunting for unicorns”.
