Opperman fires back over universal DC charging structure

The Department for Work and Pensions is considering replacing the three permitted charging structures for default funds with a single structure. This would allow a single percentage annual management charge, based on the value of the member’s pot within the default fund.

The DWP is trying to help DC members choose between pension products and protect them “from high and unfair charges and from the risk of erosion to their pension savings from such fees”, it said in November 2021 as part of its consultation.

We have a costs and charging system that is utterly incapable of price comparison

Guy Opperman, pensions minister

It has admitted that this proposal would in particular affect the master trust industry, which it noted is unlikely to break even until 2025.

Earlier this week, B&CE, the provider of The People’s Pension master trust, and master trust provider Aegon spoke out against the proposal. 

B&CE warned that a flat fee structure solely for auto-enrolment pension providers could distort the market, disadvantage auto-enrolment savers, and prompt an increase in charges from pension providers.

Kate Smith, Aegon’s head of pensions, meanwhile suggested that universal charging could encourage a race to the bottom on charges and even force some schemes to wind up. 

“This is the wrong time to move to universal pension charging,” she told Pensions Expert.

Improving accessibility is key

Speaking at a Langcat event for financial advisers, Opperman accepted that there were “huge complications” in the short term over the proposal.

“We have a costs and charging system that is utterly incapable of price comparison. We have a product that is not sufficiently accessible to the wider public,” he argued. 

“In the longer term, you should be looking to make this as simple as you possibly can so that an individual member of the public, who wishes to understand their costs and charges, can do so, and then can either price compare or have a better understanding of what value looks like,” he added.

Opperman observed that costs and charges have been the key metric for DC products since 2012. 

“That has to evolve. There has to become a different environment where costs and charges matter, but they are not the fundamental driving force of this process,” he said.

The government will not legislate on small pots before the next election

The DWP launched its consultation on flat fees and structures last year, moving to ban fixed charges for pots under £100. This will help to avoid small pots being eroded by fixed costs.

Regulations for the £100 threshold were laid before parliament in January, with the ban expected to come into force in April 2022.

The minister said that the government would not legislate further on small pots before the next election, noting that it would be impossible to secure the necessary primary legislation before then.

He suggested that better data, “wholesale consolidation” and the rollout of the pensions dashboards would improve the landscape for small pots. 

The dashboards, which are expected to gather members’ pension entitlements in one viewable place and allow them to see the value of those entitlements, are expected to launch next year.

Last year, the Small Pots Cross-Industry Co-ordination Group said that a mass-scale consolidation would be implemented in 2025-26.

Among the group’s duties has been searching for the optimal approach to tackle the administrative challenges for low-cost transfers, along with identifying a solution to the growing number of small deferred DC pots.

“If we had far, far fewer providers, then small pots become a much easier problem,” Opperman said.