In its consultation response, LCP argues that:
- Member borne flat fees are particularly detrimental to the low-paid and part-timers, the majority of whom are women;
- Flat fees can erode the value of small pension pots, and in extreme cases could run the balance down to zero over time, which is both unfair and creates reputational risk for the industry;
- The costs for the industry of running millions of small deferred pension pots could be reduced if DWP tackled the proliferation of small pots; the phased abolition of member borne flat fees should therefore be accompanied by new policies to ensure small pension pots are consolidated
The consultation also asks for views on whether (and how) transaction costs should be included in the overall charge cap. In its response, LCP is sceptical of including transaction costs, noting that in most cases these are actually very small and in many cases negative.
Additional problems with including transaction costs in a charge cap include:
- Transactions which are in a member’s interests, for example, during times of extreme market movements such as the present crisis, could be hindered or prevented if an annual cap on transaction costs had already been reached;
- Transaction costs (unlike other costs and charges) cannot be known in advance; in particular, market movements can mean that transaction costs turn out to be higher (or lower) than expected when expressed as a percentage of asset values; this makes it hard for schemes, providers and asset managers to ensure compliance; and,
- Government is keen to encourage investment in more sophisticated strategies and illiquid assets, yet these strategies and asset classes tend to be associated with higher transaction costs;
LCP is also concerned that an across-the-board reduction in the current charge cap could be to the detriment of members. This could affect the drive for asset managers to be more actively involved in looking at the environmental, social and governance impact of their investments. A reduced charge cap would also reduce the potential for providers to offer value-added services to members, such as workplace roadshows. The company notes that even with the present charge cap, market pressures have been leading to a downward pressure on charges without the need for further regulatory intervention.
Commenting, Stephen Budge, Principal in the DC Practice at LCP said: “Charging structures need to be simple and fair to ensure the ongoing success of auto-enrolment, but flat fees bite hardest on those who can least afford them. If a lower paid worker sees the value of their pension savings significant declining each year due to fees this can send a negative message about future pension saving. It is well known that managing millions of small deferred pension pots is a burden to the industry, but that is a reason to tackle the issue of small pots rather than carry on with an unfair charging structure on individual savers.
“We also believe that reducing or including transaction costs in the charge cap could have negative impacts on members.
Transaction costs in particular account for a tiny fraction of the costs of running a pension so capping them would make little difference to overall costs. Yet, the variability of these costs, which can only be calculated afterwards, could place restrictions on the ability of managers to trade which could seriously damage outcomes for members, especially in unusual market conditions of the sort we are currently experiencing. Many of the areas that the government is seeking to promote such as ESG investing and investing in illiquid assets tend to be associated with higher trading costs, and it is important that the DWP is joined up in its thinking on these issues”.
|
