• The Government has today published a call for evidence on the charge cap applied to automatic enrolment default funds (https://www.gov.uk/government/consultations/review-of-the-default-fund-charge-cap-and-standardised-cost-disclosure/review-of-the-default-fund-charge-cap-and-standardised-cost-disclosure#chapter-2-including-transaction-costs-within-the-charge-cap)
• Charge cap is currently set at 0.75% but DWP considering expanding its remit to cover transaction costs and any add-ons such as life assurance
• DWP says charge cap could be lowered as scale in auto-enrolment brings costs down for pension schemes
• Call for evidence also examines the appropriateness of flat-fee structures for auto-enrolment
Tom Selby, senior analyst at AJ Bell, comments: “Following the OFT’s scathing 2013 report on the occupational defined contribution market, the Government at the time had little choice but to introduce a cap on default fund charges.
“This was a necessary response given the dynamics of the market, in which millions of savers make no active choice and therefore exert little, if any, demand-side pressure on their provider.
“One of the biggest debates at the time the 0.75% charge cap was introduced in 2015 was whether transaction costs should be within scope. It was decided that difficulties in calculating certain ‘implicit’ transaction costs meant they should not be included at that point in time.
“Since then the FCA has agreed a measure of transaction costs, so it makes sense for the Government to revisit that decision.
“The DWP has also raised concerns members are effectively being auto-enrolled into non-pension products such as life assurance alongside their workplace scheme. While such products may be appropriate in certain circumstances they clearly are not a central part of auto-enrolment, so if member charges are being pushed up as a result then action needs to be taken.”
Scale and flat-fees
“More broadly, as pension schemes get more members and build scale the charges that members pay should naturally drift down. However, given the findings of the OFT’s 2013 report there is no guarantee this will happen, so the Government needs to keep the pressure on and consider whether a 0.75% cap remains appropriate.
“Given DIY investors can easily build a diversified portfolio for an all-in charge of well below 0.5%, reducing the default fund charge cap closer to this level should be more than doable.
“Providers employing a flat-fee auto-enrolment structure have come under fire in certain quarters. While such structures can be lower cost as members’ pots grow, for those who switch jobs they can see the value of their fund eaten away, potentially to nothing at all in the case of small pots.
“In light of these concerns, it seems sensible for policymakers to consider whether the benefits of such approaches outweigh the potential downside.”
