- Government responds to DC charge cap and costs review
- DC Pension Charges Survey 2020 published
- Regulator publishes interim response to its DB funding code consultation
- Pension Schemes Bill clears the Lords
Government responds to DC charge cap and costs review
The Government has responded to the review of the default fund charge cap and costs disclosure which it launched last summer (see Pensions Bulletin 2020/27). The main decisions made by the Government are:
- Ban on flat fee structures for default funds less than £100: the Government recognises that this will have a financial impact on some large master trusts in the automatic enrolment market which could lead to changes in fee structures by them resulting in increased costs to members with larger pension pots. However, the Government believes that setting this de minimis level (which is likely to increase over time) will provide protection for a significant number of small pots, and it has promised to undertake an impact assessment before introducing this change
- Charge cap remaining at 0.75%: 77% of respondents believed that the current cap and market competition has already led to charges for many default funds falling significantly below 0.75%, making a reduction in the cap unnecessary. The Pension Charges Survey 2020 (see article below) supported this view. Respondents expressed concern that a reduction would restrict competition, innovation and impact on schemes’ ability to invest in illiquids and other longer-term assets such as infrastructure
- Transaction costs will not be included in the charge cap: 75% of respondents said that the disadvantages outweigh the advantages of including transaction costs in the charge cap. The overwhelming view was that including transaction costs would negatively affect performance and stifle innovation
- No immediate mandation to use Cost Transparency Initiative (CTI) disclosure templates: at this time, the Government will not legislate for this, citing the view that the CTI templates (launched in May 2019) are still bedding in. However, the Government states that it will review its decision in due course if voluntary take-up is not sufficient
So, the only change resulting from this consultation is the introduction of a £100 de minimis for flat fee structures on default funds. On this, the Government remains silent as to when this will come in.
Comment
Overall, the Government’s decisions are largely what we would have wished for. They balance protection of members’ funds with the pragmatic and commercial realities of pension providers.
The ban on flat fees for pots less than £100 will protect these pots from erosion due to fees but the long-term solution needs to include some form of consolidation as considered by the Small Pots Working Group (see Pensions Bulletin 2021/01). It appears the ban will apply equally to both active and deferred pots but, in reality, nearly all active pots receiving contributions under automatic enrolment will increase above £100 very quickly after they are created. So effectively, this is a ban on flat fees for very small deferred pots.
There may be some disappointment that the Government has decided at this time not to legislate for the mandatory use of CTI templates, but hopefully the industry will continue to voluntarily increase the usage of them.
DC Pension Charges Survey 2020 published
The Government has published its latest survey on the types and levels of charges across defined contribution trust-based and contract-based workplace pension schemes. Previous surveys were carried out in 2015 and 2016. The full survey is 143 pages long so many readers may prefer to read the shorter summary!
Some of the key findings are:
- All members in those schemes qualifying as auto-enrolment vehicles now have charges below the cap – with the average charge of 0.48% significantly below the 0.75% cap
- The average charge for non-qualifying schemes is now 0.53% – a reduction of 0.20 percentage points when compared against those participating in the 2015 and 2016 surveys. As a result, 88% of members of non-qualifying schemes are now below the level of the cap
- Charges for unbundled trust-based schemes remain at 0.49% on average, with all members of qualifying schemes within the cap
- Approximately two-thirds of providers reported that they had no direct investments in illiquids in their default fund(s). About a third had a small proportion, typically between 1.5% to 7.0%. All providers investing in illiquids mentioned property as their main class of investment, with a small number also mentioning infrastructure, private equity and debt
- The main barriers to investing in illiquids related to the high costs associated with these investments, with the unpredictability of charges also a concern
An interesting point drawn out in the summary is that due to a significant number of new providers entering the market the number of pension providers returning completed templates increased from 14 in 2016 to 20 in 2020. The 14 providers in the 2016 research included 8 of the top 10 providers and 14.4 million pension pots. The providers returning templates in the 2020 survey accounted for 29.3 million pension pots and included all of the 10 largest providers.
Comment
The rationale for the survey is to provide evidence to the Government to assist it when carrying out its review of the charge cap. Whilst it appears that the Government could have chosen to reduce the cap, this would have been in tension with its ambitions for DC providers to expand asset classes within their default funds on which higher charges are likely to arise. For now, the prospect of a 0.5% charge cap seems remote.
Regulator publishes interim response to its DB funding code consultation
The Pensions Regulator has published a short interim response to the lengthy consultation document on the DB funding code issued last March (see Pensions Bulletin 2020/09). In it, it says that overall there was general support for the principles and regulatory approach proposed, but some concerns were raised on how the principles would be applied in practice – in particular the following:
- Risks associated with where Fast Track guidelines would be set (such as some schemes ‘levelling down’ and an increase in the cost of DB pension provision for others)
- Proposed Fast Track guidelines for open schemes
- Potential loss of flexibility (eg through benchmarking the Bespoke route against Fast Track)
- An increased evidential burden if choosing to submit a Bespoke valuation
- The Bespoke route may be perceived as being ‘second-best’
- Reliance on covenant being watered down and what a greater trustee focus on covenant visibility would mean for schemes’ ability to rely on covenant beyond the medium term
The Regulator is now “with an open mind” working through the issues raised by respondents and intends to publish its second consultation in the second half of 2021 – after the DWP’s consultation on draft regulations, currently expected to be in the first half of 2021. This second consultation by the Regulator will contain a full summary of the responses received, a draft code of practice, the Regulator’s proposed regulatory approach (on matters including how it will review and update Fast Track guidelines) and an impact assessment.
Comment
As the concerns relayed are not unexpected and the Regulator has kept its powder dry on how it intends to address them, all we have really learnt is that its timescale for the second consultation is slipping again – from summer 2021 to the second half of 2021. Despite the Pension Schemes Bill now being ready for Royal Assent (see article below) it will be some while yet before DB schemes are subject to the new DB funding regime.
Pension Schemes Bill clears the Lords
The Pension Schemes Bill, which returned to the Lords from the Commons on 16 November (see Pensions Bulletin 2020/47) but was only debated on 19 January, has now completed its Parliamentary stages and is awaiting Royal Assent which we believe to be imminent.
This week the Lords had to consider the four amendments put through by the Commons – all of which removed the non-Government amendments made in the Lords.
- On collective money purchase schemes Baroness Stedman-Scott for the Government said that regulations to come will set out clear principles and processes that schemes must follow to ensure that different types of members are treated the same where appropriate – for example requiring there to be no difference in treatment when calculating and adjusting benefits between different cohorts or age groups of scheme members, or between members who are active, deferred or receiving a pension
- On pensions dashboards she said that the Government will not allow any qualifying dashboard to be launched before that of the Money and Pensions Service and that dashboards will be launched with a simple “find-and-view” facility. She went on to say that while increased functionality on dashboards, such as enabling transactions to take place, could bring real and significant benefits for consumers in the future, such enhancements would be introduced only as a result of user testing, after careful review and with the right level of consumer protections in place
The three amendments made by the Commons in relation to collective money purchase schemes and pensions dashboards were then accepted.
Turning to the fourth amendment, relating to the funding of open DB schemes, Baroness Stedman-Scott said that the most appropriate means by which concerns in this area could be addressed were through regulations to come. She said that the Government “had made a clear commitment to ensuring that regulations work in a way that does not prevent appropriate open schemes investing in riskier investments where there are potentially higher returns, provided the risks taken can be supported and that members’ benefits and the Pension Protection Fund are effectively protected”.
In response, Baroness Bowles, a Liberal Democrat peer, explained how she along with other peers had submitted five points to Guy Opperman that should be taken on board when finalising the DB funding regime. After further contributions and in wrapping up the debate Baroness Stedman-Scott set out some key principles for the framing of the regulations – which appeared to take on board all of what Baroness Bowles was requesting. These included the following:
- The DB funding regime will remain scheme-specific and as such continue to apply flexibility to take account of individual scheme circumstances – such as being open to new members
- The position of open and less mature schemes will be acknowledged in both the regulations and the Regulator’s DB funding code
- Consultation on the regulations will be informed by prior engagement with interested parties, including a range of schemes including those remaining open and immature
- The Government will publish a regulatory impact assessment of the draft regulations and the Pensions Regulator will publish an impact assessment alongside its revised code. These will include analyses of different de-risking approaches on members and sponsors of all schemes, including those that are open or immature, and those that are not targeting buyout
Baroness Stedman-Scott concluded by saying that she wanted to make it absolutely clear that open schemes do not necessarily have to invest in the same way as closed schemes, before going on to state that the Government completely agrees that “open schemes that are not maturing and have a strong employer covenant should not be forced into an inappropriate de-risking journey”.
She also accepted that for some schemes “member benefits can be best safeguarded by an appropriate integrated risk management strategy determined after careful analysis by the trustees, which takes account of time horizon, liquidity, employer covenant and appropriate diversification”.
The fourth amendment made by the Commons was then accepted and the Bill completed its passage through the House of Lords.
Comment
We must now wait for the regulations, but it does seem that the sustained pressure from the House of Lords is likely to result in a new funding regime that will treat open schemes differently to closed schemes, but with the aim of ensuring that the security of the former is not less than that of the latter. This in itself is not a new development – the Government has been flagging this in Parliament for some while – but the Bill’s last outing in Parliament was an opportunity to crystallise its latest thinking which should be good news for the sponsors of open schemes.
In Baroness Stedman-Scott’s last contribution it is not clear which schemes she had in mind, but the narrative implies that it is wider than open schemes. Hopefully, this is an indication that the Bespoke route will be given more flexibility than originally proposed by the Regulator.
As to the Bill itself we now await Royal Assent, but when that comes, whilst it may feel like the end of a long journey, in reality it is more like half-time. Much secondary legislation and guidance needs to be drafted, consulted upon and refined before the Act can be put into effect.
