DWP calls for evidence on AE charge cap and cost transparency

The Department for Work and Pensions (DWP) has announced a call for evidence on how effective pension costs, charges and transparency measures are in protecting member outcomes.

It is seeking industry views on the “level and scope” of the charge cap applicable to default arrangements within defined contribution (DC) schemes used for auto-enrolment (AE).

The cap is set at 0.75 per cent of funds under management and has applied since April 2015.

The government had reviewed the cap in 2017 and decided at the time to not make any changes but to re-review in 2020.

It is also seeking views on the appropriateness of permitted charging structures and the extent to which they should be limited.

Furthermore, it wants to gather evidence on the options available to assess take-up and increase the usage of standardised cost disclosure templates.

Pensions Minister, Guy Opperman, described the consultation as "an important step towards ensuring charging structures are fair, transparent and effective for the long term" that deliver "value for money for DC pension scheme members".

“I look forward to hearing constructive feedback from industry and other key stakeholders over the next six months, and to working closely together to secure retirement incomes," he added.

In the consultation, the government asks for industry views on whether transaction costs and other costs associated with life assurance products should be included in the 0.75 per cent charge cap.

It also warned that there is a risk in significantly reducing the cap as it may discourage schemes from considering certain asset classes or force them to sell investments they already hold.

Commenting on the consultation launch, Smart Pension director of policy and communications, Darren Philp, said: “The DWP is right to issue a call for evidence so it looks at any potential changes based on a robust understanding of the impact of any change on members, employers, schemes and the wider competitive market.

“Master trusts have done the bulk of heavy lifting in delivering the government's AE policy but are now experiencing massive increases in the number of deferred members and dormant small pots.

“The DWP needs to make sure it understands the economics and cross subsidies that exist within schemes, particularly those with a high number of members with small pots, before making changes to the charge cap or charging structures."

AJ Bell senior analyst, Tom Selby, added: “One of the biggest debates at the time the 0.75 per cent charge cap was introduced in 2015 was whether transaction costs should be within scope. It was decided that difficulties in calculating certain ‘implicit’ transaction costs meant they should not be included at that point in time.

“Since then the FCA has agreed a measure of transaction costs, so it makes sense for the government to revisit that decision.

“The DWP has also raised concerns members are effectively being auto-enrolled into non-pension products such as life assurance alongside their workplace scheme.

"While such products may be appropriate in certain circumstances they clearly are not a central part of auto-enrolment, so if member charges are being pushed up as a result then action needs to be taken.”

The call for evidence closes on 20 August 2020.

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