The Government has confirmed plans to stop flat fees eroding the smallest DC pension pots. It is still considering whether to force all DC default fund charges to be calculated in the same way.
The Department for Work and Pensions (DWP) has issued an initial response to its May 2021 consultation paper on permitted charge structures in the default funds of defined contribution (DC) schemes that are used to satisfy an employer’s automatic enrolment duties.
As planned, from 6 April 2022, the per-member part of fees may not be charged on DC pots valued at £100 or less, and may not reduce pot values below £100, although the percentage element of a combination charge can be applied. This will appy to both active and deferred members. Where an individual has multiple pots with the same provider, their value can be aggregated when determining whether a flat fee is permitted. Non-statutory guidance will say that pots should be valued either monthly or annually, with flat fees deducted on the day of valuation.
No decision has yet been made on the much bigger question asked in the consultation paper: whether combination charges should be prohibited in DC default funds, so that all charges are calculated as a percentage of funds under management. Currently, the National Employment Savings Trust combines a 0.3% annual charge on assets with a 1.8% charge deducted from contributions, while some other Master Trusts charge per-member fees alongside a charge calculated as a percentage of assets. Together, these providers serve roughly 17 million members. Some single employer trusts also apply combination charges.
In his foreword to the consultation response, Guy Opperman, the pensions minister, says he “will not rush into making decisions”. The DWP, he says, “will respond separately on this issue and set out next steps shortly”.
Part of the logic for the DWP proposing a single fee structure in May was to “enable members to compare pensions, and exercise choice where they feel an alternative pension product could more closely meet their needs”. Mr Opperman’s foreword to the latest document says: “I want to drive up member awareness of their pensions, and enable them to make informed choices to ensure they are contributing to the pension product that suits them best.” This reads as though the minister remains attracted to the idea of employees choosing which pension scheme receives their employer contribution – a big change to the current workplace pension framework, which would require primary legislation.
