The DWP is proposing to introduce a new rule meaning where the member’s fund value is below a certain size, initially £100 or less, providers will have to waive any flat fee element of the charging structure, leaving the percentage charge as it is. This will apply to active and deferred members and is expected to be effective from April 2022.
The consultation is also exploring the idea of moving to a universal charging structure by rationalising the three permitted charging structures for default funds with one charging structure based on a percentage of funds under management, which ties in with the charge cap of 0.75% of funds. This would mean that combination charging would no longer be permitted.
“Automatic enrolment has been an incredible success, with many millions of additional employees now contributing to a workplace pension. It’s important that every penny saved counts towards people’s retirement income. One growing issue is the increasing number of individuals who leave their employer shortly after they’ve been auto enrolled, leaving behind a small ‘frozen’ pension pot, with no ongoing contributions. There are a small number of auto-enrolment schemes which charge a flat fee every month or year and here, there is a risk that very small pots could be gradually wiped out by these fees. Banning flat fees whenever an individual’s fund is under £100 will help although it’s more of a symbolic gesture than something which will make a huge difference to retirement outcomes. We believe longer term solutions are needed to enable savers to automatically combine these small pension pots.
“Introducing a single universal charging structure for default funds will make it easier for savers to compare charges across their pensions schemes. Due to auto-enrolment and a fluid workplace market, people tend to have several pension schemes, and it may be difficult for them to compare their pensions charges, if one or more of their schemes use combination charges. The reality is that only a minority of pension schemes use combination charges, and these are largely master trusts aimed at the mass auto-enrolment market, with NEST being the prime example. 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% on each new contribution and a 0.3% 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.”
https://www.gov.uk/government/consultations/permitted-charges-within-defined-contribution-pension-schemes
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