The Department for Work and Pensions (DWP) has launched a review to assess the effectiveness of costs, charges and transparency measures in protecting pension member outcomes.
The call for evidence progresses the commitment made by the government following the 2017 review of the charge cap to re-examine the scope and level of the charge cap in 2020, and to review permitted charging structures.
In particular, the DWP is looking for views and evidence on the following:
- the level and scope of the charge cap applicable to the default arrangement within certain defined contribution (DC) pension schemes used for auto-enrolment
- whether or not the charge cap should be extended to include some or all transaction costs
- the appropriateness of permitted charging structures and the extent to which they should be limited
- options to assess take-up, and widen the use of standardised cost disclosure templates
Pensions and financial inclusion minister Guy Opperman said: "Today's call for evidence is an important step towards ensuring charging structures are fair, transparent and effective for the long term, delivering value for money for DC pension scheme members.
"I look forward to hearing constructive feedback from industry and other key stakeholders over the next six months, and to working closely together to secure retirement incomes."
The DWP said that, as part of this review, a 2020 charges survey would capture the full range of charges that are applied to qualifying schemes, including transaction costs, costs of any life insurance products or charges paid by employers.
It said it would also survey decumulation charges for both the member and the employer applied to those drawing down from their pension to provide insight into the developing occupational pension scheme decumulation market.
The DWP said this survey would inform the review of the charge cap and provide the best possible evidence to assess whether the downward trend in charges has continued and whether any changes are needed to protect scheme members.
It said: "The responses from this call for evidence will be used to evaluate the impact of charges measures and allow the government to assess whether it is achieving the difficult balance between minimising industry burdens, protecting scheme member interests and enabling long-term capital allocation."
The consultation closes on 20 August and the DWP pledged to set out its findings by the end of the year.
The initial industry response to the consultation welcolmed the review.
Smart Pension director of policy and communications Darren Philp said: "The introduction of the charge cap and increased transparency around transaction costs were both important steps in driving value for money and are driving better member outcomes.
"The DWP is right to issue a call for evidence so it looks at any potential changes based on a robust understanding of the impact of any change on members, employers, schemes and the wider competitive market."
He added: "Master trusts have done the bulk of heavy lifting in delivering the government's auto enrolment policy, but are now experiencing massive increases in the number of deferred members and dormant small pots. The DWP needs to make sure it understands the economics and cross subsidies that exist within schemes, particularly those with a high number of members with small pots, before making changes to the charge cap or charging structures."
LEBC director of public policy Kay Ingram said the DWP - along with a separate Financial Conduct Authority review of workplace value for money - had opened the door to "thorough debate on value" within workplace schemes.
"Employers who deal directly with product providers may think dealing with the 'manufacturer' is lower cost but the reality is that pension consultants can achieve better terms for members and assist employers with communication," she said. "During the recent lockdown we have guided employers through the changes made to the Job Retention Scheme and how this affects pensions and other benefits for their staff and this added value for employers and members and competitive charges are the advantages of employing pension consultants when reviewing workplace pensions."
Pensions and Lifetime Savings Association (PLSA) head of DC, master trusts and lifetime saving Lizzy Holliday added: "The PLSA supports today's call for evidence on costs and charges in the DC pension market.
"The charge cap on DC pension schemes is an important consumer protection, ensuring savers receive better value for money from their pensions. DWP's findings are consistent with our own: in practice most DC schemes' default funds operate well below the charge cap."
Aegon head of pensions Kate Smith argued the DC market was "vibrant and competitive" and offered "good choice and value" in its current state, however.
"Continual innovation to support members' saving and introducing new types of investments such as illiquids and infrastructure comes at a cost," she said. "Including transaction costs in the charge cap, is fraught with impracticalities, and capping these costs could impact on the types of default funds provided leading to lower member returns.
"The DWP is considering making a number of changes to the 0.75% charge cap for default funds of DC schemes used for AE. The vast majority of workplace members invest their pension contribution in default funds and many scheme charges are comfortably below the charge cap, as evidenced by the 2016 charges survey."
She continued: "Cutting the charge cap could have unintended consequences for members' savings and the wider economy as a whole. Due to the devasting effect of the coronavirus crisis, and the expected economic downturn, we're expecting to see a steep rise in the number of small paid-up pension pots, some of which are subject to flat fee structures. These can quickly erode the value of the members' pot, and it's something the DWP should quickly address."
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