Disadvantages of lowering DC charge cap outweigh advantages – PLSA

The disadvantages of lowering the 0.75 per cent charge cap on defined contribution (DC) pension schemes’ default funds outweigh the possible advantages, the Pensions and Lifetime Savings Association (PLSA) has said.

In response to the Department for Work and Pensions’ (DWP) call for evidence on the charge cap and cost transparency, the PLSA argued that the cap should not be reduced as it would place limitations on asset managers trading.

Furthermore, it warned that lowering the cap would likely “reduce sophistication and dampen innovation” in default investment strategies, especially by decreasing some schemes' ability to allocate to private and less liquid asset classes.

“The charge cap on DC pension schemes is an important consumer protection, ensuring savers receive better value for money from their pensions,” commented PLSA head of DC, master trusts and lifetime saving, Lizzy Holliday.

“DWP’s findings are consistent with our own: in practice most DC schemes’ default funds operate well below the charge cap.”

In response to the proposal to include transaction costs in the charge cap, the PLSA argued that this would act as a barrier for schemes acting in members’ best interests and would limit investment options, and therefore should not be considered.

It also stated that the limitations on the flat fee structure proposed in the call for evidence would not address the issues surrounding small pots and would increase complexity and cost.

The PLSA urged the DWP to consider the small pots problem more holistically and to work with the industry to consider “more ambitious” solutions.

The organisation added that it welcomed the progress the industry had made on cost transparency and commended the success of the Cost Transparency Initiative (CTI).

However, it said that it did not think legislative intervention to support the uptake of the initiative was appropriate but did issue its support for increased monitoring by The Pensions Regulator.

Holliday concluded: “We’re pleased the government recognises the work the pension and investment industries have undertaken via the CTI to establish and promote new industry standards for cost reporting.

“Recently, the CTI published additional templates which will further help pension schemes drive value for money for their savers by allowing them to compare costs across their investments more easily.

“That doesn’t mean the pension industry is standing still. The PLSA is working with our members to achieve even better outcomes for all savers, including finding solutions to the small pension pots issue.”

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