Govt to ban flat fees on AE pensions of under £100; puts universal charges on backburner

The government has confirmed that it will ban flat fee charges as part of a combination charge on default defined contribution (DC) pensions used for auto-enrolment (AE) with pots worth less than £100 from April 2022.

In its response to its Permitted Charges and Defined Contribution Pension Scheme consultation, the Department for Work and Pensions (DWP) stated that the de minimis will apply to active and deferred pots.

The government will continue to monitor the impact of the de minimis and will issue non-statutory guidance on the regularity or timing of period when a member’s rights should be valued.

It will recommend that valuation should be taken at regular intervals either monthly or annually, while flat fees should be deducted on the day of valuation, if applicable.

The consultation also proposed moving to a single, universal charging structure for use within default funds of DC pension schemes used for AE.

However, the DWP found that there was a “broad majority” that opposed moving to a universal charging structure and it will propose its next steps on the matter in a separate response “shortly”.

Respondents warned the government that the change could lead to fewer providers offering pensions in the AE market, leading to a reduction in diversity of products and investment policies.

Furthermore, “a number of” respondents stated that member inertia was a more significant barrier to members understanding charges than the structure of those charges, and government prioritisation of improving member engagement was suggested before any charge simplification.

The government said it will consider the evidence on a universal charging structure in more detail before making any policy decisions and will continue to be receptive to new evidence concerning improvements to transparency of member charges and costs comparability.

“The consultation, which ran from 24 May 2021 to 16 July 2021, has helped broaden our evidence base, and understanding of respondents’ views regarding the proposal for a universal charging structure,” said Pensions Minister, Guy Opperman.

“I know this is of great interest to the AE sector and I believe that clarity and comprehension around charges is important, but I will not rush into making decisions.”

Commenting on the consultation response, Aegon pensions director, Steven Cameron, said: “The government’s decision to ban flat fees being deducted from auto-enrolment pension pots of under £100 to avoid them being wiped out is understandable.

“However, a pot of £100 will make no difference to income in retirement, and even if it could be annuitised, would generate only a few pence per month. With this in mind, we see these changes as more of a symbolic gesture than a genuine means of improving retirement outcomes.

“The decision means that those firms who have offered this choice of charging to employers, in return for a lower fund based charge, will now need to update systems and communications ahead of the April 2022 introduction. This will take resource away from many other more important developments such as preparing for pension dashboards.

“Bearing in mind flat fees where they exist are typically small, the monetary impact on individuals of a year’s delay would also have been very small.

“We’re pleased however that the government is not rushing into universal pension charging across all auto-enrolment pensions.

“There’s a real risk doing so will cause serious damage to the pensions market, which is currently vibrant and competitive offering a range of propositions and employer choice with bespoke charging.

“Universal pension charging could encourage a race to the bottom in terms of charges and ‘vanilla’ pension propositions as innovation will be discouraged and competition stifled, potentially filtering down to poorer member outcomes.”

Interactive Investor head of pensions and savings, Becky O’Connor, added: “Preserving small pots against erosion below £100 from flat fees will prevent the disappointment of a workplace pension falling in value to £0. However, even with this ban in place, it is still possible for the value to be eroded to just £100, which won’t go very far in retirement.

“Anyone worried about small pension pots being eroded by charges who has a number of them from old jobs could consider bringing them together in one place. This also has the advantage of making it less likely that you will forget about old, low value pensions from the past and therefore less likely that any will be eroded to such low levels.

“It’s disappointing not to see more at this stage from the DWP on what a fair charging system for pensions looks like. It is vital that pension costs and charges are better understood and more comparable for scheme members as fees can make a big difference to retirement outcomes. At the moment, millions of workers paying into a workplace pension are completely in the dark about whether they are getting good value.

“A more transparent and comparable charging structure could finally bring fees into the spotlight and enable people to make better informed decisions about which provider should look after their money.”

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