Consultants have warned that cost constraints are holding defined contribution (DC) schemes back, responding to a Department for Work and Pensions’ (DWP) consultation on the effectiveness of costs, charges and transparency measures.
The DWP's call for evidence opened in June to progress 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.
The DWP asked for industry feedback on the level and scope of the charge cap applicable to the default arrangement within DC schemes used for auto-enrolment (AE), as well as whether or not the charge cap should be extended to include some or all transaction costs. The consultation closes today.
In its response published this morning (20 August) consultancy Lane Clark & Peacock (LCP) said the flat-fee structure should be scrapped all together to prevent small pots losing value.
LCP DC practice principal Stephen Budge said: "Flat fees bite hardest on those who can least afford them. If a lower paid worker sees the value of their pension savings significant declining each year due to fees this can send a negative message about future pension saving.
"It is well known that managing millions of small deferred pension pots is a burden to the industry, but that is a reason to tackle the issue of small pots rather than carry on with an unfair charging structure on individual savers."
Another area in which the government sought feedback was around the appropriateness of permitted charging structures and the extent to which they should be limited.
The Investing and Saving Alliance (TISA) head of retirement Renny Biggins said DC schemes "are already hampered by the charge cap in accessing these markets due to cost constraints."
He added: "As the AE market matures and assets under management grow, we want schemes to be strong and well-funded propositions, which provide security for members and increase public confidence in the pensions industry.
"It is also worth noting that the introduction of the cap has led to a strong focus on costs, rather than considering the more holistic picture and value for money. A lowering of the cap could exacerbate this focus."
Biggins argues that the existing cap in combination with the governance of the trustee and independent governance committees provided an effective enough framework to ensure that transaction costs do not become excessive.
"And it allows providers some leeway in driving forward innovation to benefit both consumers and the Industry," he said. "We need to be mindful that any change to the fee treatment of small deferred pots does not disincentivise consolidation, where a favourable fee structure removes the inclination to move a deferred pot to another pot which incurs higher fees.
"A balanced approach is required to achieve the desired outcomes."
Biggins said any reduction of transaction costs, or addition of them in the charge cap, would have negative impacts.
"Transaction costs in particular account for a tiny fraction of the costs of running a pension so capping them would make little difference to overall costs," he said "Yet, the variability of these costs, which can only be calculated afterwards, could place restrictions on the ability of managers to trade which could seriously damage outcomes for members, especially in unusual market conditions of the sort we are currently experiencing."
He added that the government's planned focus areas of promotion, such as ESG investing and investing in illiquid assets tended to be associated with higher trading costs.
"It is important that the DWP is joined up in its thinking on these issues," he said. "Charging structures need to be simple and fair to ensure the ongoing success of AE."
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