Patrick Luthi: Squaring cross subsidy and pot erosion

We accept all employers without filtering or underwriting. But being in this position, we have a frighteningly clear picture of the growing issue of small deferred pots – which are estimated to grow to 27 million by 2035. This issue must be urgently addressed. However, the solutions are not simple, and there is unlikely to be a single, silver bullet.
The Government needs to work with the sector to address these issues. Resolution of high numbers of small, deferred pots could, in time, lead to improvements being made in the level and structure of the charge cap as well as possible improvements in member engagement as they see their pots grow to a more substantial size.
We are encouraged by DWP’s recognition of the importance of combination charges. These are important in guarding against excessive cross subsidy between members and ensuring transparency. It is notable that all five core AE providers have some form of combination charges. It is these core AE providers that have done the heavy lifting by ensuring that the Government’s ambitions for AE can be met.
We recognise, however, DWP’s concern that combination charges coupled with high numbers of small deferred pots can lead to some members having their savings eroded by charges. We share that concern and propose a three-part plan to eliminate this issue:
Now: Pensions has already ensured that members with multiple pots within the scheme are charged only once for the administration fee and is seeking a solution to consolidate these pots for savers –
proposals for the introduction of a floor of £50 beneath which deferred members are not charged for administration; and supporting a taskforce to address the sector-wide issue of small pots and reach a solution in advance of the next review of the charge cap which could then deliver a sustainable long-term solution.
However, setting the level below which charges cannot be levied, and therefore members pots cannot be charged out, is a careful balancing act between fairness to all members, and ensuring the existence of a cap does not introduce cross subsidy; not creating a disincentive to members to transfer to combine their pots; and not undermining the financial sustainability of master trusts, which would not be in members’ best interests.
Any floor should also be simple for members to understand and for providers to administer.
We believe that a good outcome from the charging review would be a balanced approach to change, in which no members can see their savings, however low, completely eroded as a result of the effect of charges, but which enables the core AE master trusts to be financially sustainable and able to continue to serve the core AE market; and the creation of a taskforce comprising industry, government, regulators and consumer groups to address the sector-wide issue of small pots and reach a solution in advance of the next review of the charge cap which could then deliver a sustainable long-term solution.
As an industry, we need to work together to ensure that the progress and successes of AE continue, and that its mission to give more people than ever a chance to save more easily for their futures is upheld.