DWP proposes universal charging structure for AE default funds

The Department for Work and Pensions (DWP) has proposed moving to a single, universal charging structure for use within default funds of defined contribution (DC) pension schemes used for auto-enrolment (AE).

Under the proposals, the universal charging structure would be based on a single percentage charge for member-borne costs and combination charging would be banned.

The DWP is seeking views on whether it should move to a single charging structure and how it could best implement the changes.

While the government acknowledged that the change would "inevitably impact" some providers, particularly master trusts, it said it was aiming to enable better member comprehension of the charges they pay, and their pension's other features, to improve engagement.

Within the consultation, the DWP asked whether the proposal to move to a single charging structure would change the way employers select the scheme they use for AE and if an employer would continue to pay their 3 per cent minimum contribution if their employee moved their pension savings to a different provider.

It is also seeking opinions on the broader direction it should take on the future structure of charges that are permitted within the charge cap.

"We have considered the present permitted charging structures, and we believe there is a risk that these varied charging structures, within the same automatic enrolment market may be acting as a barrier to members’ better understanding and ability to compare the costs of their pension with other pension products and schemes," the consultation stated.

The consultation, Permitted charges within DC pension schemes, comes following the government's Review of the Default Fund Change Cap and Standardised Cost Disclosure, and is seeking views on proposed policy for the implementation of the de minimis threshold outlined in the review.

It also confirmed that the ban on flat fees on pots worth less than the threshold of £100 would go ahead.

In the foreward of the consultation, Pensions Minister, Guy Opperman, said: "I believe that moving, in the future, to a single, universal charging structure could make a significant difference to the transparency of charges, make comparison easier, and unlock greater choice for members.

"I know, however, that the lowest price product may not necessarily always be the best one for the member. It may not deliver the required retirement income they need, or it may not fulfil other preferences, perhaps including how, or in what types of pension product, their money is invested. We will use this consultation to consider your views on how these wider considerations could inform our policy on a single charging structure."

Opperman acknowledged that providers using combination charges are the most likely to face challenges in adapting to the changes, and was "keen to hear the views of the industry" on how the transition could be managed.

Responding to the consultation launch, Smart Pension director of policy, Darren Philp, said: "It is important that pension costs and charges are transparent and understandable for members and the industry has come a long way in improving transparency in recent years. But this call for evidence into standardising charges is premature.

"While there is a debate to be had about how pensions are charged for, this needs to be considered in the round. We need to move away from constant piecemeal changes, which continually adds complexity. Moving to AMC only pricing at this stage, will cause instability to exactly those schemes that have done the heavy lifting in making auto enrolment such a success. All the main AE providers charge on a dual basis, which recognises the economics of running these schemes. We don't want to go back to the bad old days where some providers just cherry picked the profitable business. We should stop, pause and think, and let the market mature so all schemes are sustainable over the longer term.

"We think more still needs to be done to improve and assess value, but the government needs to fully understand the huge market distortion it would be creating if it implemented these changes in the near term, including for its own scheme, Nest. Workplace pensions have never delivered as much value for money as they do now, and looking to change the fundamental basis of the market at this point in time risks the progress we have made over the past ten or so years."

The consultation is open for responses until 16 July 2021.

Commenting on the ban on flat fees for pension pots worth less than £100, Opperman stated: "We all know what a success automatic enrolment has been in getting more people saving into private pensions – with over 10 million employees paying into a workplace pension since 2012.

"But for some, particularly those who regularly take on short-term work and change jobs frequently, there is a greater chance that they will be automatically enrolled into new workplace pensions a number of times, building up a collection of small pots. It is this group we want to help by changing the way fees work."

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