Permitted Charges within DC Pension Schemes – Sackers’ response to consultation
The DWP is consulting on the policy around the implementation of a threshold (or de minimis) below which the flat fee element of the combination charge used by pension providers cannot be charged to members. It is also seeking views on the broader direction it should take on the future structure of charges that are permitted within the charge cap. The Government proposes to move to a single, permitted universal charging structure for use within the default fund of qualifying DC schemes used for automatic enrolment.
In this response
We welcome the opportunity to respond to this consultation.
We have not sought to answer every question in the consultation but have limited our responses to those areas which are pertinent to our practice.
Overlap with small pot consolidation
We agree that introducing a threshold (or de minimis) below which the flat fee element of the combination charge used by pension providers cannot be charged to members is a positive step forward in that it will potentially help to limit the erosion of the value of micro pots for members. We also see this as being a helpful step in the context of the wider work of the ABI/PLSA Small Pots joint industry initiative, where the Government is closely involved in formulating proposals to consolidate small pots. Noting that the work of the ABI/PLSA industry initiative on small pots has a direct impact on the de minimis proposals, in our view, it is very important for the timing of the two initiatives to be carefully considered and that their impact is aligned. We say this because it would be unhelpful if the introduction of the de minimis became a barrier to implementing the work of the ABI/PLSA initiative because, for example, consolidating two pots under £100 meant the total combined value exceeded that amount and therefore became subject to a flat fee, meaning it was not considered to be value for money. We would be supportive of the Government working closely with the ABI/PLSA industry initiative to ensure that the proposals dovetail. We believe that the combined effort of the industry initiative and the Government’s policy intent on de minimis flat fee charging, if carefully thought through, could work really well together to avoid erosion of small and micro pots.
Risk of focusing on costs and charges
We agree that reviewing approaches to costs and charges is an important part of a strategy which seeks to improve value for money for members. However, in our view, charges are only one of the factors which should be considered by pension arrangements when determining the extent to which a particular product or arrangement offers value for money for members. When assessing the value provided by their arrangements, trustees’ and IGCs’ assessments also include (among other matters) their funds’ performance, the quality of services members receive, and the quality of member engagement. We know that these other quantitative and qualitative factors are important to the Government and indeed are prescribed in legislation as factors to consider. Whilst a de minimis threshold for flat fee charges is a helpful step in combatting fund erosion for micro pots, putting charges in the spotlight over and above other significant areas of value risks reducing the importance of these other areas in a value assessment. Further, it risks members failing to understand how a higher cost or charge could result in better value (for example, where the fund is actively managed and high performing). This might result in members choosing to opt out of a good value scheme and / or to move to one which offers poor value but lower costs. We understand from other recent consultation documents that the Government is aware of the historic “over emphasis” on costs and charges, and welcome the move to consider ways in which it can balance their importance against other quantitative and qualitative factors around investment performance, quality of service and engagement.
Similarly, although a simpler universal charging structure could facilitate comparison of costs and charges between different schemes, we are concerned that such a move could, in practice, have administrative complexities.
Q1. Do you agree with our proposal that the de minimis should apply to all active and deferred pots? If not please outline why.
We agree that the de minimis should apply to active and deferred pots, but it needs to be workable from an administrative perspective. Given the nature of a DC arrangement, micro pots could move between being inside scope and outside scope many times in a volatile year and for active pots, ongoing contributions could make a micro pot out of scope in a short space of time. We presume that, to manage this, administrators would be asked to measure pots at a specific point in time during the “charges year”. We think it would be helpful for this to be made clear in the regulations.
Q2. Do you envisage any challenges for members and providers if the de minimis is applied to multiple pots within the same scheme?
The current restrictions on charges are drafted with a single default arrangement in mind. A number of schemes we work with have multiple default arrangements. For this reason, it should be made clear whether the de minimis would apply to each default arrangement individually or across all default arrangements in a scheme. It is conceivable a member would belong to more than one default, either as a result of previous employment(s) or because their employer offers more than one. We would expect that any requirement to apply the de minimis across multiple default funds could present a challenge to administrators.
Please also see our answer to Q4 (below).
Q3. Would proposed implementation in April 2022 create any business or operational challenges?
It is likely that schemes would need to build administrative systems to implement the proposals. We think that doing this in time for April 2022 is likely to create significant challenges for pension arrangements and their providers, particularly in light of the large amount of regulatory change being implemented over the coming year.
Q4. Do the draft Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2021 achieve the policy intent for implementing the de minimis?
It is our understanding that the intention is for the de minimis to apply only to pots in the default fund(s) (as opposed to across a scheme as a whole). However, it is not entirely clear from the consultation (or the draft legislation) that this is intended, so this should be clarified.
It is also our understanding that where a member’s total rights exceed £100, even if this is across more than one pot, the de minimis will not apply. If this is the Government’s policy intent, we think this is achieved by the draft legislation.
Q7. In introducing a de minimis the policy objective is not intended to inhibit scheme consolidation of multiple deferred small pots. Could you tell us if you think there would be any impact?
Introducing a de minimis could be considered to be a complimentary workstream to the scheme consolidation plans. It will entail schemes starting to carry out some of the checks that may be required when one or more solutions to managing small pots are introduced. For example, the need to check whether a member has more than one pot in the default.
Q9. Does the current system impede members from carrying out a comparison of costs and charges between different schemes? If so should the system be reformed to allow for simple price comparison of costs and charges?
While costs and charges information is available, there is no easy way to compare schemes. Each set of information is discrete and there is no common charging structure (and not necessarily all schemes use the same “charges year”). We agree that some form of simple price comparison could be useful as part of a wider disclosure mechanism. However, being in a very low-cost fund is only beneficial if that fund is providing a good return. It could be more useful for members to be able to see how their fund is performing, relative to its charges, and to be able to compare that across schemes.
Q12. Are there other ways, besides changing the charging structure, that could make a significant difference to member comprehension of charges and encourage improved member engagement?
It would be helpful if charges were presented in the same way and explained in the same simple, jargon-free manner. We understand this is the intention of the guidance on costs and charges which sits behind the chair’s statement and part of the rationale of the simpler annual benefit statement. All this information is useful but it’s not clear that many members engage with it, let alone understand it. Further, as noted above, the key is for members to understand the overall value they are receiving from their scheme.
Improved understanding of charges and improved member engagement will require improved financial education and a greater understanding of the value of a pension.
In the same way that the Pensions Regulator has produced simplified generic information to members about transfers and scams (in the form of the “Scorpion” leaflet provided to members who request a transfer out) we think there could be real value in creating simplified infographics and generic information for members about costs and charges during their early period of scheme membership. There is a risk, otherwise, that provision of stark costs and charges “numbers” could drive unforeseen and unwanted member behaviours. For example, members may decide to move to lower charging funds without understanding that lower charges do not necessarily equate to better member outcomes. We would anticipate that the Regulator could offer this in conjunction with MaPs and the FCA, as it is an issue that affects both contract based and occupational pension schemes.
Q13. What other risks exist for members who may choose to make decisions on which occupational pension scheme they should save into, based purely on the level of the charges they may pay?
In practice, few employees choose which scheme they save into. An employer will offer one scheme and, should a member not wish to join it, they would not benefit from the employer’s contribution. The only alternative would be for the member to choose their own personal pension scheme (as an occupational scheme needs an employer connection) but in our experience it is unlikely that employers would be willing to contribute to a member’s personal pension arrangement when they operate their own occupational scheme or pay into a master trust or similar.
Q14. Will this proposal to move to a single charging structure change the way employers select the pension scheme they use for automatic enrolment and would an employer continue to pay their 3% minimum contribution if the employee decides to move their pension savings to a different provider?
We do not think this would have a significant bearing on the way employers choose their auto-enrolment scheme, as this choice does not generally simply come down to costs, or the structure of those costs.
In our experience, as noted above, it would be unusual for an employer to pay contributions into a different pension scheme for employees who decide to move their pension savings to a different provider, as this would involve administrative complexity from a payroll/auto-enrolment perspective.
Q15. Do employers who are choosing a pension scheme routinely negotiate the level of their own charges with the provider, and if so what impact may this have on the employee’s contributions?
In our experience, the larger employers do routinely negotiate the level of their own charges with the provider, with larger employers tending to reach better deals. However, if your question is asking whether any resulting “savings” are used to subsidise employee contributions, we have not seen this happen in practice. The level of employee’s contributions is more likely to be impacted by other factors, for example, the degree of contribution matching the employer is offering. Increasing awareness of the value of pension saving and improved financial education are also factors which might impact the level of employee contributions.