Industry makes case for unchanged AE charge cap as consultation nears end

Pensions industry members have backed leaving the automatic enrolment (AE) charge cap unaltered as the Department for Work and Pensions’ (DWP) consultation on the issue draws to a close.

The consultation, which was announced in June, sought industry views on the charge cap applicable to default arrangements within defined contribution (DC) schemes used for AE, with the cap currently being set at 0.75 per cent of funds under management and having applied since April 2015.

Amongst other issues, the process involved gathering industry views on whether transaction costs and other costs associated with life assurance products should be included in the existing charge cap.

Summing up his response to the consultation, Tisa head of retirement, Renny Biggins, argued that the current charge cap already served to hamper DC schemes seeking to fulfil industry aims of widening investment “into the illiquid landscape, most notably green and environmental, social and governance (ESG) initiatives”.

“A lowering of the charge cap would cause further access issues, preventing the creation of more sophisticated default investment strategies,” warned Biggins.

Barnett Waddingham Partner, Mark Futcher, agreed, stating: “Transaction costs are not the most material issues facing DC pension schemes, and introducing a cap would divert scarce trustee time away from other more beneficial developments like enhancing investment strategies using illiquid assets and making meaningful changes responding to the new ESG regulations.

“Lowering the cap will restrain the design of default strategies and restrict trustees’ ability to enhance their investment governance and meet coming requirements like climate change disclosures.”

Aegon pensions director, Steven Cameron, echoed these sentiments, arguing that the focus should be on "other aspects" of improving member outcomes.

"Cutting the cap would remove the margin necessary to focus on ESG solutions, alternative investments including infrastructure and patient capital, digital engagement, personalised video communications or guidance support," he added.

“Bringing transaction costs within the cap or limiting them separately could also do more harm than good. Transaction costs are different from other charges as they’re a necessary cost incurred from investing and higher costs can be beneficial if they improve investment returns."

Biggins also noted that the introduction of the original charge cap had led “to a strong focus on costs, rather than considering the more holistic picture and value for money”, cautioning that lowering the cap could “exacerbate this focus”.

Futcher pointed out that the addition of a cap on transaction costs risked “placing too much emphasis on ‘cost’ over ‘value’ could lead trustees to focus on simplified and less sophisticated investment strategies for fear of breaching the cap”.

He concluded: “Member value is also eroded by poor choices and a lack of products, services and support for retiring members. Pension freedoms have been around for more than five years, but the industry has not yet caught up with the extra products, services and solutions needed.

“If the government want to protect pension member outcomes, then the next area to consider must be support for members at and through retirement.”

Aside from calling for no change to the AE charge cap, Biggins also emphasised the importance of structural changes to the fees applying to deferred pension pots, especially as many people could face redundancy in the aftermath of the Covid-19 crisis.

He stated: “We agree that the fee structure and level which apply to deferred pots needs to be addressed to ensure that that these pots, particularly when of a small value, are not completely or nearly extinguished before retirement is reached.”

Biggins added: “We need to be mindful that any change to the fee treatment of small deferred pots does not disincentivise consolidation, where a favourable fee structure removes the inclination to move a deferred pot to another pot which incurs higher fees. A balanced approach is required to achieve the desired outcomes.”

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