DWP promises consultation on DC default charge cap
UK – The UK Department for Work & Pensions (DWP) is to consult on the introduction of a charge cap for default investment options in defined contribution (DC) funds.
The announcement came as pensions minister Steve Webb pledged to react "promptly and vigorously" to forthcoming findings from an Office of Fair Trading investigation into the level of competition on pension charges.
The department also published the finalised draft of the Pensions Bill that will legislate for the single-tier state pension, the DWP's pot-follows-member proposals and a new statutory objective for the Pensions Regulator.
However, David Robbins, senior consultant at Towers Watson, warned that a charge cap would only be a blunt instrument.
"A charge cap on default investments might help deal with high commission-laden charges, so many members would certainly benefit," he said.
"However, it would be a blunt instrument, and the government would have to ensure that any cap remained at a level that did not stifle investment innovation."
He argued that while a 1% charge on a "simple" tracker fund would not be good value for money, it could be appropriate for a more "sophisticated" diversified growth fund.
"New thinking in investment should not be confined to defined benefit schemes, where employers are on the hook for any losses," he said.
"It's just as important in defined contribution schemes where investment performance feeds straight through to the member's retirement income.
"As defined contribution account balances grow, so will the case for spending money on managing investments as well as possible.
"Stopping this would amount to cutting off your nose to spite your face."
Webb has previously seemed opposed to a charge cap, voicing concerns it could result in consumers feeling a false sense of comfort over a product that falls just below a government threshold.
The opposition Labour party, publishing a number of policy proposals last week, said they would legislate for a 1% cap on charges.