A UK government consultation on charges on default funds within defined contribution (DC) schemes discusses changes that could have “fundamental impacts on the current and future evolution of the pension market,” according to the Pensions and Lifetime Savings Association (PLSA).
Nigel Peaple, director of policy and advocacy at the industry body, said a more detailed and holistic assessment of the market impact of the proposals, alongside other interrelated interventions, should be undertaken before the government’s ideas were taken further.
In a consultation document published this week, the Department for Work and Pensions (DWP) proposed to move to a single, permitted universal charging structure for use within the default fund of DC schemes used for automatic enrolment.
Currently three charging structures are permitted in relation to such funds. In the consultation document, the government also confirmed a ban on the charging of flat fees on pension pots of less than £100m.
Pensions minister Guy Opperman said he believed a move to a universal charging structure “could make a significant difference to the transparency of charges, make comparison easier, and unlock greater choice for members”.
Peaple said the PLSA supported the DWP’s aims of promoting cost transparency and comparability, but that “within the wider proposals in the consultation document are some significant changes which could have fundamental impacts on the current and future evolution of the pension market”.
Alyshia Harrington-Clark, head of DC, master trusts and lifetime savings at the PLSA, told IPE some of the changes discussed could have “pretty fundamental consequences in terms of how auto-enrolment works”.
In the consultation document, the government said that by way of facilitating better member comprehension, a universal charging structure could enable members to exercise choice “where they feel an alternative pension product could more closely meet their needs”.
Opperman said he also wanted to use the consultation to explore how an “employer’s responsibilities may influence an employee’s decisions to switch to an alternative fund or provider”.
Harrington-Clark, however, questioned how the government’s discussion about employee choice and the role of employers fit with the UK auto-enrolment model.
“Employee choice of provider is not the current UK model,” she said. “Is the DWP opening up a conversation about what the best model of auto-enrolment is? We would tend to agree that much more involved thinking and assessment of the impact are needed before these ideas go anywhere further.”
In the consultation document, the government said it would carefully consider how employers’ role may influence or impact, if at all, a member’s preference to switch funds within their existing provider, or switch provider completely, as a consequence of the charging structure proposal. This included the question of how the employer’s mandatory contribution might influence the member’s decision on switching.
Difficulties for master trusts?
In its consultation paper, the government said its proposal was for a universal structure allowing charging of a single percentage annual management charge, based on the value of the member’s pot within the default fund – combination charging would no longer be permitted.
It said the change, if implemented, could in particular impact master trust schemes that serve most of the auto-enrolment market, citing research that the master trust industry was unlikely to breakeven until around 2025.
It noted that NEST, which is the largest master trust, charges members via a combination charge structure and has a public service obligation to accept all eligible individuals automatically enrolled by their employer, even if the charge income derived from the member does not meet the cost of administering their pension.
“Any potential impact on existing, or potential members from this proposal will be carefully considered alongside responses received,” the DWP said.