On the go: LCP is calling for an end to flat monthly fees being charged on defined contribution pots, arguing they can be “detrimental” to low-paid and part-time workers, although the government has previously stated it is not considering a ban.
In its response to the Department for Work and Pensions’ consultation on the automatic enrolment charge cap, which closed on Thursday, LCP argued that fixed fees can “steadily erode” small pension pots, especially those left behind when people change jobs, and in extreme cases can reduce the pot to zero.
The problem with the flat-fee structure — which some master trusts apply in combination with an annual management charge under the cap, for administration purposes — is that for individuals who save for a short period of time with a scheme could end up paying a higher charge, since the fee is levied on the dormant pot each month irrespective of whether contributions continue to be paid.
LCP said this is both “unfair and creates reputational risk for the industry”, and has called for the phased abolition of flat fees while the government comes up with new policies for small pot consolidation.
Stephen Budge, principal in the DC practice at LCP, said: “Charging structures need to be simple and fair to ensure the ongoing success of auto-enrolment, but flat fees bite hardest on those who can least afford them.
“If a lower-paid worker sees the value of their pension savings significantly 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.”
However, despite admitting that the flat-fee structure in its present form does not provide adequate protection, the DWP said it can be beneficial for savers with bigger pension pots, which is why the government is not considering a complete ban of this charge.
Instead, to prevent small pots from being eroded to zero, the government is considering measures that will set a minimum pension pot size before a flat fee can be charged.
The consultation also asked the industry if the current 0.75 per cent cap for DC default funds should be lowered, or if transaction charges should be included under the cap.
The Investing and Saving Alliance is against changes to the threshold, saying it will stop the creation of better investment opportunities.
Renny Biggins, head of retirement at Tisa, said: “We support the ongoing desire from government and the pensions industry to widen investment into the illiquid landscape, most notably green and environmental, social and governance initiatives, but DC schemes are already hampered by the charge cap in accessing these markets due to cost constraints.
“A lowering of the charge cap would cause further access issues, preventing the creation of more sophisticated default investment strategies.”
This article originally appeared on ftadviser.com
