• The DWP has announced that flat fees will be banned for automatic enrolment pots worth £100 or less
• Decision comes after research revealed young people with small deferred auto-enrolment pots risked seeing them whittled away to nothing by the time they reach state pension age
• The overall auto-enrolment charge cap will remain at 0.75%
• Transaction costs will not be included in the charge cap
Tom Selby, senior analyst at AJ Bell, comments:
“The Government is clearly concerned about the impact flat fee charging structures could have on those with very small deferred retirement pots.
“This problem is likely to get worse as time goes on, with people having 11 employers on average during their careers and potentially building up a new pension each time they change jobs.
“By banning flat fees on deferred pension pots worth £100 or less, the DWP hopes to end the most egregious rip-offs in this market and protect the fragile reputation of automatic enrolment.
“In particular, young people who save small amounts in an auto-enrolment pension before moving to a new employer are at risk of seeing their retirement pot eroded to dust by flat fees.
"Analysis carried out for the Government shows a £100 pot, deferred at age 22 with an annual flat fee charge of £20 and an annual management charge of 0.25%, would be swallowed up entirely by these charges well before they reach state pension age.
“The DWP has said the level at which the ban kicks in will be reviewed, and it would be no surprise to see this increase in the future. If you consider a £500 pension pot deferred at age 22 under the same charging structure, this would be worth just £100 by age 68.
“Put another way, a £20 flat fee on a £500 fund is equivalent to a 4% charge - a figure which, by retail pensions standards, represents very poor value for money.”
Charge cap remains at 0.75%
“While there are arguments for reducing the charge cap given many auto-enrolment schemes have benefitted from increased scale, respondents persuaded ministers schemes need the extra flexibility to look after the interests of members.
“Coronavirus in particular has had a significant role to play in this decision, with the Government acknowledging ‘the importance of affording schemes the flexibility of using headroom to deal with these challenges’.
“The DWP is also pushing auto-enrolment schemes to pursue more innovative investment strategies, for example by purchasing illiquid assets and putting environmental, social and governance (ESG) factors at the forefront of their thinking.
“Such strategies usually come at a cost, so by keeping the cap at 0.75% policymakers will hope to encourage more creative thinking by pension schemes.
“The desire not to overly constrain schemes’ room for investment manoeuvre also appears to be behind the decision to keep transaction costs out of the charge cap for now. This move, while pragmatic, will likely anger campaigners who have long argued that these costs are material and thus should be included within the cap.”
