• The Department for Work and Pensions (DWP) has today set out plans to overhaul the way members of workplace schemes are charged (Permitted Charges within Defined Contribution Pension Schemes (publishing.service.gov.uk))
• Flat fees will be banned where pension pots are worth £100 or less from April 2022 in a move designed to boost value for money for members
• Government also considering mandating ‘universal’ charging structures to make it easier for people to compare workplace pensions
• In addition, DWP is seeking views on the extent to which employers are willing to match contributions where employees choose a different pension scheme
Tom Selby, senior analyst at AJ Bell, comments:
“The last thing the Government needs is for automatic enrolment, a policy that has enjoyed incredible success and cross-party support, to be associated with ‘rip-off’ headlines.
“By banning flat fees on small pots worth £100 or less from April 2022, the Pensions Minister is taking swift action to protect not only people’s pensions, but the reputation of the Government’s flagship reform programme.
“It is positive that a simple £100 cut-off has been proposed, rather than the ‘tiered’ approach which could have become horribly complicated.
“Having moved to address this value for money issue, focus will inevitably turn to the Prime Minister’s promise to address the ‘net pay anomaly’ which means over a million low paid employees miss out on tax relief each year.”
Enabling greater employee choice?
“Automatic enrolment has undoubtedly been hugely successful in boosting the number of people saving something for retirement, but the levels of contributions remains, for most people, too low.
“The Pensions Minister now appears to be gearing up for this challenge by addressing issues around worker engagement with their pensions.
“The idea of allowing employees to choose their own pension provider while keeping their employer contribution merits consideration. This would potentially open up greater choice to automatic enrolment savers, who at the moment are often offered a ‘like it or lump it’ single workplace pension option.
“If employees could choose their provider and keep their employer contribution, this could increase engagement and place greater competitive pressure on the market.
“The Government will need to be cognisant of the impact any change such as this might have on employers administering these pensions. Anything which adds an extra administrative burden onto companies is likely to be undesirable, particularly given the struggles many already face as a result of the pandemic.”
A single ‘universal’ charging structure?
“For automatic enrolment you can see the argument for a single, universal charging structure. Given members are being shoved into a product rather than actively choosing it, being able to compare like-for-like with other similar products might be useful.
“Anything that simplifies things for people saving for retirement and improves their ability to engage with their pension would be a good thing.
“However, such an approach would not be appropriate for non-workplace pensions, where people actively choose where to save and benefit from being able to pick a provider whose charges, among other things, meet their needs.”
