The UK government is to consider capping fees charged by defined contribution (DC) funds, imposing either an absolute limit of 0.75-1% or allowing a more flexible comply or explain approach.

As the employer association CBI warned that a fee cap could lead to higher costs amid “historically low” charges by some pension providers, the Department for Work & Pensions (DWP) said its consultation would also consider banning active member discounts (AMDs), whereby fees increase if a member ceases contributing to a pot.

In the consultation’s foreword, pensions minister Steve Webb also stressed that examining the method of fee disclosure was as important as the potential for a cap.

“We want to assess what can be done to improve transparency in pension scheme charges and to look at whether there is a role for the government in improving disclosure,” he said.

“We also want to test the case for capping default fund charges and have offered a range of structures to help tease out some of the various issues.”

The department proposed introducing either a 1% cap or a 0.75% cap, or imposing a 0.75% threshold while allowing companies to justify charges up to 0.25 percentage points higher when registering a new scheme with the Pensions Regulator (TPR).

Webb hinted at a comply or explain approach during a recent speech, saying that if companies could justify a charge higher than the cap, they should be allowed to “make the case”.

Under proposals, a cap would come into effect from April 2014 for any companies yet to reach their staging date for auto-enrolment, while any firms already compliant with auto-enrolment would have until 2015 to comply.

Shadow pensions minister Gregg McClymont was quick to attack the proposals when announced by Webb in the House of Commons yesterday, arguing there was “a gap between the rhetoric and the reality” of Webb’s pronouncements on fees.

The proposals also received a mixed response from the industry, with the National Association of Pension Funds (NAPF), Barnett Waddingham and master trust provider B&CE warning that it was more important to view fees in the context of value for money.

The NAPF’s head of policy and advocacy Helen Forrest emphasised the importance of transparency and scale in delivering good pensions outcomes.

She said: “Charges should be seen as part of a bigger picture that includes quality of services provided to savers through their working life and a robust investment strategy that generates good returns.”

Mark Futcher, a partner at Barnett Waddingham, welcomed government action “to curtail overly high pension charges”.

But he added: “Charges need to be viewed in context – it is the overall value that is important. Good-quality education, engagement and governance are important factors, and we have seen much legislation and best practice guidance in this area.”

Meanwhile, Darren Philp – until recently the head of policy at the NAPF and now acting in a similar capacity for B&CE master trust The People’s Pension – urged the DWP to standardise the industry’s fee-charging structure, noting that, without such an approach, the attempt to lower costs would be “futile”.

“Our view is that pension providers should focus on value for money – giving the best product possible at the cheapest possible price – rather than inventing new and often obscure methods of charging,” he said.

Union umbrella group TUC was more positive about the cap, but said the potential for a 0.75% cap was only a “good initial step” to provide members the reassurance they required.

The group’s general secretary Frances O’Grady said: “In the longer term, we want the charge cap to be reduced to 0.5% – the level that good schemes like NEST already charge.”

Proposals for an inflexible fee cap come after Webb previously seemed opposed to such an approach, noting that it could result in employers getting “false comfort” that the annual management charge on offer was low enough to attract government approval, when better rates could be achieved.

The consultation will close by 28 November.