Govt urged to give pension providers transition period for DC charges changes

The government has not given providers enough time to adapt to the changes proposed in its consultation on charges for defined contribution (DC) schemes, according to Premier.

Premier head of DC consulting and technology, Sue Pemberton, warned that, due to providers running their schemes across different platforms, calculating pot sizes and establishing whether certain pots should be subject to fees would be difficult to apply in “the current timescale”.

The Department for Work and Pensions (DWP) intends for a threshold to be brought in by April 2023.

The consultation, which closes today, outlined plans for the removal of member-borne charges on pots with less than £100, moving to a single universal percentage management charge for default automatic enrolment (AE) schemes and having employers pay AE contributions to schemes chosen by employees.

Pemberton said: “Arguably, it’s the providers who will lose out if they cannot establish if the total pot size is above the charge threshold. Getting this right will be a major, time consuming task. There is a need for speed and delaying too long could be costly, but the DWP should offer providers a transition period.”

Even so, she branded the threshold a “good idea” and said that a step towards a universal charging structure was “an exciting development and could be hugely beneficial, especially in light of the new value for member assessment requirements which now must be included in Chair’s Statements”.

She explained: “Currently, when you assess the value provided by a scheme you are restricted to comparisons to schemes with a similar charging structure. A standardised universal charging system will make things easier and go a long way to opening up the market and enhancing choice and transparency.”

Aegon head of pensions, Kate Smith, was less positive about the proposed changes, arguing that pots of £100 would “make no difference to income in retirement” and thus describing the proposals as “more of a symbolic gesture rather than a genuine way to improve members’ retirement outcomes”.

She added: “A far better way of improving member outcomes would be to join this up with the joint industry/government initiative looking at small pots solutions, rather than advancing this as a standalone policy.

“Removing the flat fee for pots of £100 or less creates a barrier to small pot consolidation, as the new scheme’s charges are likely to be higher once the flat fee has been cancelled.”

Smith argued that moving to a universal percentage annual management charge “could do serious damage to the pensions market” as it may “encourage a race to the bottom in terms of charges and ‘vanilla’ pension propositions, with competition stifled”.

Additionally, she argued that plans to force employers to pay into pensions chosen by employees “introduces more costs and complexity and risks undermining the future success of auto-enrolment and workplace saving”.

She explained: “It shouldn’t be forgotten that many employers contribute more than the auto-enrolment minimum and may be less likely to do this if they are forced to pay into a scheme which isn’t their workplace scheme, especially if it costs them more to do so.

“Employees already have the flexibility to manage their pension outside their employer’s auto-enrolment scheme by transferring funds already built up into their own SIPP of personal pension.”

Also commenting on the closing of the consultation, Smart Pension director of policy, Darren Philp, said: "While there are clearly merits in having a standardised approach to charging, we would question the timing.

"The auto-enrolment market is still relatively immature and the risk of unintended consequences of moving to a single charging structure could be huge.

"Far better for the government to focus its energy on taking forward a positive agenda on developing a better framework for assessing value for money, introducing the pensions dashboard, solving the small pots issue, and focussing on investments to better serve society and the planet, rather than trying to fix something that isn't broken.

"We would urge the government to create this clear roadmap for change and leave standardised charging alone until the market matures."

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