Charge cap consultation ramps up governance, weakens employers

Pensions minister Steve Webb yesterday announced a charge cap of 0.75 per cent of funds under management, within the default funds of qualifying DC schemes, from April 2015.

If you’re taking away benefits from employers in order to deliver benefits to people who once worked for a company, that seems to go against the grain

The charge cap will include all member-borne charges and deductions, but exclude transaction costs. The government will review whether to include transaction costs in 2017, taking into account whether there has been an improvement in the disclosure of such fees.

It will also consider bringing the cap down further at this time. “What we really need to say is that employers and trustees need to be aware that there is a number of [products] in the marketplace offering considerably better value than the cap of 0.75 per cent,” said Adrian Boulding, head of strategic policy at insurer Legal & General.

Boulding said an employer that moves from a scheme with charges at 0.75 per cent to one at 0.5 per cent would give its members on average an extra £50 a week in retirement income.

In its previous consultation on the issue, the government outlined three options for setting a charge cap – at 1 per cent, 0.75 per cent or a two-tier comply-or-explain structure.

The government has released analysis that shows how mastertrusts that use a dual charging structure will qualify. 

“They are silent on schemes where the charge changes over time, ie 0.5 per cent in early years, rising to a max of 0.8 per cent for a few years as a derisking phase kicks in with [diversified growth funds], then drops to 0.4 per cent when it gets into [the] retirement phase,” said Andrew Cheseldine, partner at consultancy LCP.

Active member discounts will also be banned for qualifying schemes from April 2016. However scrapping AMDs may leave members unadvised if they cannot or will not pay fees after that point, Cheseldine said, adding: “The big issue will be defining [AMDs]."

Employers will also be prevented from moving members into a higher-charging personal pension plan.

It is disappointing that the government has set the charge cap at the lowest of the proposed levels, considering the requirements to provide members with at-retirement advice announced in the Budget, said Neil Carberry, director for employment and skills at the CBI. He also criticised the AMD ban.

“If you’re taking away benefits from employers in order to deliver benefits to people who once worked for a company, that seems to go against the grain,” he added.

Increased trustee responsibility

From April next year trustees and independent governance committees will have new duties to consider and report on charges and costs.

Trustees’ responsibility for overseeing the default investment strategy will be set out in legislation and the Pensions Regulator will intervene where members’ savings are deemed to be at risk because of a lack of oversight.

The government has stated that responsibility for ensuring standards of administration meet members' needs rests with trustees rather than a third-party administrator or provider, when one is being used.

It will also introduce requirements for “complete, comparable and consistent information” on costs and charges to trustees and independent governance committees.

Mastertrust boards must have seven trustees, with the majority independent to those that provide services to the mastertrust.

Contract-based schemes will be required to embed independent governance committees, which will be established via Financial Conduct Authority rules.

“The interesting thing will be to what extent the companies set that up or [whether it is] going to be set up by the providers of [a] contract-based scheme,” said Andrew Power, insurance partner at consultancy Deloitte.