The pensions industry has welcomed the government’s decision to scrap flat fees for auto-enrolment pension pots worth less than £100, although some have called for more drastic action.

The announcement, which followed a consultation on charge caps, stated that this minimum would be kept under review ahead of a possible increase at some point in the future.

Nest director of strategy, Zoe Alexander, said: “This is a welcome move from the government. We know even a small pension pot can make a big difference to savers in retirement and charging structures with a flat fee element run the risk of eroding small and micro pension pots to zero. These changes will help protect savers and their pension pots.”

The Pensions Regulator executive director of regulatory policy, analysis and advice, David Fairs, said the regulator supported the plans and argued that they would “help reduce the erosion of members’ pensions by fees”.

AJ Bell senior analyst, Tom Selby, commented: “By banning flat fees on deferred pension pots worth £100 or less, the DWP hopes to end the most egregious rip-offs in this market and protect the fragile reputation of automatic enrolment.

“In particular, young people who save small amounts in an auto-enrolment pension before moving to a new employer are at risk of seeing their retirement pot eroded to dust by flat fees.”

He added that government analysis had shown how severe the effects of flat charges could be on a small pot, with a £100 pot deferred by a 22 year old having the potential to be “swallowed up” by charges “well before they reach state pension age”.

Also looking into the data, LCP pensions research team senior consultant, Tim Box, said: “The recent DWP Small Pots Working Group report found that 25 per cent of deferred pots in a survey of five of the largest DC pension providers are less than £100 this decision will benefit literally millions of pension savers.

“However, over time a better solution would be to make sure that very small pots get consolidated into larger pots, and DWP needs to drive forward in this area.”

He was not alone in urging further action, with Aegon pensions director, Steven Cameron, commenting: “Banning flat fees whenever an individual’s fund is under £100 will help. But longer term, it would be far better to find ways of making sure small ‘frozen’ pots left behind when changing jobs are joined up with the individual’s other pensions.

“Pensions dashboards when they are launched in 2023 will allow individuals to see all of their pensions in one place, helping them keep track and ideally encouraging them to consider ‘consolidating’ them. In addition, we support the ongoing work on other ways schemes and providers can join up small pots for the benefit of members.”

Additionally, Hymans Robertson partner, Rona Train, said: “As the number of small deferred pots increases, the erosion of pots by flat fees will become a bigger issue and the £100 limit seems reasonable, although somewhat arbitrary – and potentially challenging to administer as pot values vary in size over time based on investment returns.

“Clearly, this could have an impact on the type of business certain master trust providers may be prepared to accept, particularly in relation to high turnover businesses and increases the importance of finding a longer term solution to effective pot consolidation.”

As well as sharing thoughts on the abolishment of flat fees on small pots, the industry also welcomed the decision to maintain the charge cap at 0.75 per cent.

Cameron stated: “We are pleased the DWP has concluded this market is working effectively. While many schemes charge well below the cap, leaving it unchanged means schemes have a margin to invest in innovation or to add new types of investment into their default funds, with the aim of boosting returns.”

Box agreed, pointing out that “the Pension Charges Survey 2020 shows the average charge across all members of qualifying schemes is 0.48 per cent - significantly below the current charge cap”, arguing that this showed that “providers have been working hard to reduce costs for commercial reasons” and keeping the cap the same would retain scope for providers to offer innovative investment solutions.

Train stated: “Over time, it’s likely that we will see more investment innovation in the DC marketplace and schemes should have the ability to add more sophisticated strategies to their default arrangements where they believe these will genuinely improve net of fee outcomes for their members.

“The DWP’s conclusions highlighted low investment in illiquids and, where there is investment, this being property. We feel this now offers clarity to review, improve and provide those better outcomes within default investment.”

Finally, looking at how members could soon have an increased awareness of the charges on their retirement savings, Fairs commented: “We also welcome plans to monitor take up of the cost transparency initiative templates. Transparency of costs and charges information is an important factor in helping savers achieve good retirement outcomes.”

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