The Department for Work and Pensions’ proposed ban on flat fees on pots under £100 should be seen as a temporary stopgap, not a permanent solution to the small pots problem, industry figures have warned.
The ban, announced on Wednesday as part of the government’s response to the review of the default fund charge cap and standardised cost disclosure, is intended to provide a reprieve for members whose small pots are being eroded by fees and administration costs.
It will not be possible to solve the charging issue without resolving the small pots problem — consolidating small pots could lead to better value for savers
Phil Browne, The People’s Pension
Research by the Pensions Policy Institute has suggested the number of small, deferred pots in master trusts could surge from 8m to 27m by 2035, with the cost to members in fees and other charges reaching £1.2bn, in some cases wiping out small pots entirely.
While the ban was broadly welcomed, commentators and industry figures said its impact on master trusts would be minor, and expressed concern that it might take away some of the impetus from essential long-term reform.
Master trusts make minor changes
Of the four master trust providers identified by the DWP that use a form of flat fee structure, only two told Pensions Expert the ban would require them to make any changes at all; and those changes would be minor.
Phil Browne, director of policy at B&CE, the provider of The People’s Pension, told Pensions Expert: “We have a small cash charge of £2.50 a year, and we anticipate that the government’s announcement on the charging cap will require only a minor change to our charging structure.”
Zoe Alexander, Nest’s director of strategy, welcomed the government’s move, arguing that “charging structures with a flat fee element run the risk of eroding small and micro pension pots to zero”.
“We support ongoing scrutiny by the government into charging structures. It is important schemes are fully transparent about, and closely monitoring, all costs that fall on their members,” she said.
However, a Nest spokesperson told Pensions Expert that the master trust’s charges — an annual management charge of 0.3 per cent on the total value of a member’s fund each year, and a contribution charge of 1.8 per cent on each new contribution — were proportionate.
As such, they “will never erode small or micro pots to zero”, and are “[outside] the scope of this change”, they said.
Speaking to Pensions Expert on Wednesday, Adrian Boulding, director of policy at Now Pensions, declined to say whether the master trust would be altering its fee structures, citing the proximity of another government consultation.
Finally, Darren Philp, director of policy and communication at Smart Pensions, pointed out that the provider had voluntarily introduced a similar model to that mandated by the DWP some time ago, and the only change involved would be in expanding it to include active members.
The de minimis currently applies only to deferred members, he explained. But he added that the change is “ultimately more of an administration and operational headache than a big issue for us”.
‘Sticking plaster’ ban does not solve small pots
Lee Hollingworth, partner at Hymans Robertson, told Pensions Expert that the move represents a “sticking plaster”.
“Certainly, it will reduce the risk of pots being reduced to zero. That’s clearly the intention here, but it doesn’t solve the problem of small deferred pots. That’s still a work in progress,” he said.
“Longer term, that needs to be addressed,” Mr Hollingworth continued, pointing to the establishment of the small pots working group, which proffered a number of potential solutions including automatic consolidation in December.
“But I have some reservations. I’m sceptical about the timeline here in terms of if and when anything will actually get implemented to address that issue,” he said.
Mr Browne echoed the need for a sustainable, long-term solution to the small pots problem, drawing a link between it and the issue of charges, which the DWP’s ban sought to address.
“It should not be forgotten that the charges issue and the issue of people often having many small deferred pots are linked,” he said.
“One in four pots in the five largest master trusts is under £100, and the running costs of these are cross-subsidised by members with larger funds. It will not be possible to solve the charging issue without resolving the small pots problem – consolidating small pots could lead to better value for savers.”
Small pots report recommends member exchange trials
The pensions industry should begin work to facilitate mass exchanges of sub-scale defined contribution accounts, according to a government-commissioned working group looking to address the problem of small pots.
Mr Philp concurred, arguing that issues around flat fees — which can better align cost to revenue — simply do not exist once pots are above a certain size, and so consolidation of some form remains the desirable long-term solution.
He said it was important the DWP did not go “too far” on the issue of flat fees on small pots, for fear of “[taking] the pressure off in terms of pot consolidation”.
