DWP decisions on pension charges welcome, but more action needed on small pots

The announcements by DWP of its plans for pension scheme charges have been welcomed by Tim Box, Senior Consultant in the Pensions Research Team at consultants LCP.

DWP have decided:

• Not to change the standard 0.75% charge cap on automatic enrolment default funds;
• To ban the use of ‘flat’ fees on pension pots of less than £100;
• Not to include transaction costs in the charge definition for automatic enrolment.

Tim Box said:

“The decision to prevent flat fees being charged for the smallest of pension pots created under automatic enrolment makes sense, especially given the large number of small ‘stranded’ pension pots. The recent DWP Small Pots Working Group report found that 25% of deferred pots in a survey of five of the largest DC pension providers are less than £100 this decision will benefit literally millions of pension savers. However, over time a better solution would be to make sure that very small pots get consolidated into larger pots, and DWP needs to drive forward in this area.

“We also believe it is sensible to keep the charge cap at the existing level of 0.75%. The Pension Charges Survey 2020 shows the average charge across all members of qualifying schemes is 0.48% - significantly below the current charge cap. This shows that providers have been working hard to reduce costs for commercial reasons but keeping the cap at 0.75% retains scope for providers to offer innovative investment solutions (such as in illiquid assets) which may cost more but are likely to deliver better member outcomes in the long-term.

“Finally, we are relieved that transaction costs are not to be included within the charge cap at this time. This is a pragmatic decision that will avoid additional complication in the charge cap calculations.