Industry welcomes ban on flat fees for small pots; urges further assessment of wider proposals

The pensions industry has welcomed the Department for Work and Pensions’ (DWP) consultation on implementing the ban on flat fees for pension pots worth less than £100, while warning that the wider proposals around charges could have “serious consequences” on master trusts used for auto-enrolment (AE) and will need further assessment.

The DWP’s consultation confirmed that the ban on flat fees on pots worth less than the threshold of £100 would go ahead and proposed moving to a single, universal charging structure for use within default funds of defined contribution (DC) pension schemes used for AE.

It also sought opinions as to whether employers would continue to pay their 3 per cent minimum contribution if their employee moved their pension savings to a different provider.

“We support plans to introduce a limit on pension pots below which flat fee charges cannot be levied,” commented The Pensions Regulator executive director of regulatory policy, analysis and advice, David Fairs. “This will help reduce the erosion of members’ pensions by fees and protect the benefits of savers with small pots.

“We look forward to continuing to work with industry and government to ensure any solutions developed will be in the best interest of all DC members and deliver improvements to saver outcomes."

B&CE, provider of The People’s Pension, director of policy, Phil Brown, said he welcomed the confirmation that the DWP would set the charge cap de minimis for cash charges at £100.

“Advanced notice that this was the likely threshold has allowed us to plan to comply with this change before it becomes mandatory next spring,” he added.

“The DWP and the regulators have a packed agenda, including dashboards, regulatory fees, simplified annual statements, small pots, the retirement journey, value for money and now the future of pricing. Many of these issues are interrelated and should not be treated in isolation; pricing isn’t just about transparency; it should be about fairness for members as well.”

AJ Bell senior analyst, Tom Selby, noted it was “positive” that the DWP had chosen a simple £100 threshold rather than a tiered approach.

Commenting on the proposed single, universal charging structure, Selby said that members being able to compare like-for-like with other similar products “might be useful”.

“Anything that simplifies things for people saving for retirement and improves their ability to engage with their pension would be a good thing.

“However, such an approach would not be appropriate for non-workplace pensions, where people actively choose where to save and benefit from being able to pick a provider whose charges, among other things, meet their needs.”

Pensions Bee chief engagement officer, Clare Reilly, said a universal charging structure and ban on combination charges was “the only way to offer comparability, transparency, and real engagement with pensions”.

She continued: “At PensionBee we've long called for the abolition of combination charges, charges that at best confuse savers, at worst erase their savings to zero. A single fee charging structure gives customers clarity, confidence and control in their understanding of how our service, and indeed, all pensions should work.”

PLSA director of policy and advocacy, Nigel Peaple, issued the association’s support of the government’s aim to promote cost transparency and comparability, but warned that the wider proposals could have “fundamental impacts” on the current and future evolution of the pensions market.

“Before taking these ideas further, we think a more detailed and holistic assessment of the market impact of these proposals, alongside other interrelated interventions, should be undertaken,” he added.

Introducing a universal charging structure will make it “easier” for savers to compare charges, according to Aegon head of pensions, Kate Smith, but noted that “only a minority of pension schemes use combination charges”.

“These are largely master trusts aimed at the mass auto-enrolment market, with Nest being the prime example,” she continued. “Enforcement of a universal charge structure based on a percentage of funds under management could have serious consequences particularly for this sector of the market which relies on combination charges to make their pension model viable, making it more difficult to support certain employers to comply with their auto-enrolment obligations.

“In the case of Nest, the combination charge of 1.8 per cent on each new contribution and a 0.3 per cent annual management charges was designed to help the scheme pay back its government loan more quickly, and moving to a universal charge might make this much more challenging.”

Commenting on the request for information about employers’ policies on allowing employees to move out of a workplace scheme and keep employer contributions, Interactive Investor head of pensions and savings, Becky O’Connor, said: “It is technically possible for an employee to open a personal pension, such as a Sipp, and ask an employer to pay contributions into that instead of the existing employee workplace scheme.

“However, employers often say no when an employee asks if they can move their pension out of the workplace scheme and into another personal pension and still retain employer contributions.

“This is a significant blocker to freedom of movement for people who may be better served outside of their workplace scheme.

“While most people might wish to stick with their workplace pension scheme, it should be possible to ‘pick your own’ pension, without risking losing out on employer contributions.”

Although Selby stated that employees choosing their provider and keeping their employer contribution could increase engagement and create greater competition, he warned that “the government will need to be cognisant of the impact any change such as this might have on employers administering these pensions”.

“Anything which adds an extra administrative burden onto companies is likely to be undesirable, particularly given the struggles many already face as a result of the pandemic,” he concluded.

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