SPONSORED COMMENT
There’s a distinct possibility that the government might effectively ban combination charging structures when it finally revisits plans to introduce a universal single annual management charge for members of all automatic enrolment pension schemes.
Back in November last year, the Department for Work and Pensions (DWP) published the results of the consultation on Permitted Charges within Defined Contribution Pension Schemes, which rubber-stamped the ban on levelling cash charges on pots worth £100 or less. At the time, the DWP, which has previously stated that it believes a single charge would improve transparency by allowing consumers to easily compare costs, announced it would propose its next steps on the matter ‘shortly’.
While we firmly agree with the very noble intention of government to improve transparency and enable customers to compare charges more easily, we disagree that this is the best way to do it. Over time, pension providers like us, have designed a service that works for our members. We introduced a new combination charging structure nearly 2 years ago for our 5m plus members. This would be outlawed under any moves to introduce a flat fee for all auto- enrolment schemes, as this includes a rebate on the 0.5 per cent management charge. This rebate kicks in once a saver has £3,000 or more in their pension pot and this rebate increases the more they save.
We believe this charging structure works for our membership. We’re a not-for-profit organisation, which means we focus on making things easier and fairer for our members rather than worrying about paying profits to shareholders – we call it ‘profit for people’. We’re very proud of the fact that we give back a total of more than £1m a month to a significant proportion of our members. This figure is only set to increase as auto-enrolment continues to mature and based on current charges, we calculate that this figure might rise to £34.5m a year in just 5 years’ time.
Based on the current combination charging structure, the average earner, saving over their working life with The People’s Pension, could see their lifetime annual management charge eventually fall by more than half to just 0.23 per cent. But if the government implements a universal charge, they could potentially lose out on almost £27,000* – around an additional 3 years’ retirement income.
Fairness was a key motivation for introducing our charging structure in 2020 because we wanted to reduce the cross subsidy of small, dormant auto-enrolment pots by those members who have accrued a larger pension.
Implementing a universal charging structure now and only for automatic enrolment pension providers would distort the market, putting millions of people saving through auto-enrolment at a disadvantage to those savers with retail schemes. This could cause workplace schemes to increase their charges for all members.
We know that our view is shared within the sector; respondents to last year’s consultation warned that the change could lead to fewer providers offering pensions in the auto-enrolment market, which would in turn, lead to a reduction in investment offerings.
There are a number of ways to fix the perceived problem of transparency within workplace pensions but banning combination charging structures like ours isn’t one of them. We strongly believe that this would unfairly impact hardworking savers, as it would remove incentives for saving more towards retirement, not to mention unfairly targeting auto-enrolment savers.
