Review of the Default Fund Charge Cap and Standardised Cost Disclosure – Sackers’ response to consultation
This response relates to the Department for Work & Pension’s (“the DWP”) call for evidence, seeking views on the effectiveness of costs, charges and transparency measures in protecting pension member outcomes (“the Call for Evidence”). The Call for Evidence, together with a Pension Charges Survey, will inform the Government’s review of the default fund charge cap (“the Cap”).
Set at 0.75%, the Cap generally only applies to the default fund of defined contribution (“DC”) automatic enrolment schemes, covering all member-borne charges associated with scheme and investment administration, except transaction costs and a small number of other specified costs and charges.
The Call for Evidence seeks views and evidence on the following:
- the level and scope of the Cap
- the appropriateness of permitted charging structures and the extent to which they should be limited
- options to assess take-up, and widen the use of, standardised cost disclosure templates.
In this response
The majority of the questions posed by the Call for Evidence centre around policy and the practical application of the Cap, as well as what other costs might be included or could be limited. As such, we have not sought to answer every question in the consultation. Instead, we have limited our responses to those issues which are pertinent to our practice area, or which we believe could give rise to difficulties in practice.
How much notice should be given for any reduction in the Cap?
The timescale for introducing any changes to the Cap needs to be carefully considered.
In light of the current pandemic, both schemes and providers are grappling with many difficult issues. Any change in the Cap may require administration systems to be updated. In addition, as any change will feed through to the trustees’ annual reporting requirements, in particular the DC Chair’s statement, an adequate lead-in time needs to be allowed.
We would therefore suggest a minimum period of eighteen months for this purpose. However, other respondents to the Call for Evidence may have a better feel for whether a longer period is warranted.
Do you agree with the suggestion to incorporate new conditions into flat fee structures? If not, what other ideas do you have to address the effect flat fees can have on small dormant / deferred pots?
Are you aware of any issues that would make it difficult to implement this kind of mechanism to limit flat fees, in particular, in relation to the broader issues around the desirability of consolidating small dormant / deferred pots?
Clearly, there needs to be a balance here between the interests of members with small pots and what is commercially sustainable for providers.
Back in December 2011, the Government consulted on steps to ensure that “money saved into a pension stays in a pension”. As well as considering the abolition of short service refunds from a DC scheme (this measure coming into force on 1 October 2015), the consultation expressed concerns about the proliferation of small (or “stranded”) DC pension pots. The possibility of consolidating such pensions into one or more “aggregator” schemes, or enabling them to move with people from job to job (ie “pot follows member”) was therefore considered.
Given the twin factors of an increasingly mobile UK workforce and the requirement to automatically enroll eligible workers into a good quality pension scheme, the number of stranded DC pots seems only set to rise. Having a single arrangement into which an individual could consolidate their DC pots may therefore become increasingly attractive. Of course, an aggregator scheme would need to be willing and able to accept even the very smallest pots for this to be workable. As the 2011 consultation recognised, the transfer process would also need to be as simple as possible to avoid the process becoming overly burdensome.
Viewed by the then Government as the more ambitious of the two, the pot follows member proposals were designed to tie in with the automatic enrolment regime. The idea was that a transfer could only be initiated by an individual’s new scheme once active membership had commenced, and the deadline by which the individual needed to opt out had elapsed.
We wonder whether now would be an appropriate opportunity to revisit the proposals put forward in the 2011 consultation, in particular, the viability of an aggregator scheme.
What would be the impact on scheme members / industry?
Providers will have carefully prepared business plans in place (DC Master Trusts will have had theirs assessed by the Pensions Regulator). Depending upon where it is pitched, as well as how soon it is implemented, a change in costs and charges requirements could drive providers to reassess their budget priorities. This could conceivably lead to unwelcome pressures on investment decision making and/or administration costs.