United Utilities' pension manager has voiced support for a cap on fees as it would protect default fund members from the decisions of their smaller and potentially less well-informed employers.
The Office of Fair Trading looked at fees in its report released last month, which assessed the value for money being offered to consumers by the defined contribution market. While it stopped short of recommending a cap on charges, the Department for Work and Pensions has said it is planning to press ahead with the reform.
Make people aware that if you pay this [as] your fee, you might be getting other things for it
“A maximum charge for just the default fund is sensible to protect members, especially as we are heading to the next stage of auto-enrolment with smaller and potentially less informed employers having to make selection decisions,” said Steven Robson, head of pensions at the United Utilities Group pension scheme, which has a £2bn defined benefit plan and £55m in defined contribution investments.
He added that more expensive or “adventurous” investment options should still be open to engaged and sophisticated investors willing to take on the cost and any potential additional risk “as long as the charges are simply and explicitly stated”.
Robson said he hoped a decision on fee capping would be reached quickly, “certainly ahead of the increasingly larger number of employers that will be auto-enrolling their employees from the middle of 2014 onwards”.
Appropriate pricing
The government is expected to issue a consultation in the wake of the OFT’s report, with a view to deciding a cap level and introducing any changes early next year.
In its survey ‘Auto-enrolment one year on’, published Monday, law firm Eversheds found that 50 per cent of employers believed the government should cap charges on default fund investments under auto-enrolment, compared with 15 per cent who said they should not.
But Nicola Rondel, senior associate in the pensions team at law firm Hogan Lovells, said it was not surprising that employers support a cap that would ultimately mean reduced costs for them, and there was risk that a cap would mean “throwing the baby out with the bathwater” because to some extent “you get what you pay for”.
“Trustees need to offer a range of funds that gives their members the ability to invest according to their risk profile,” she said. Rondel added that depending on how risk-averse or well-informed trustees are, a race to the bottom could be one of the consequences of a cap. But pensions minister Steve Webb “has the bit between his teeth” on the issue, she said.
Brian Henderson, head of UK DC and workplace savings at consultancy Mercer, said that if pension providers can deliver at capped prices, then it is something that “should be looked at”. However, he said there first needs to be some sort of guidance on what constitutes an “appropriate” fee.
He added: “Make people aware that if you pay this [as] your fee, you might be getting other things for it; just make them aware of what value’s been added.”
