The Government is seeking consultation on two elements of the charging structures permitted within the charge cap for default funds within a qualifying defined contribution pension scheme.
Their intention is to limit the erosion of small pension pots by introducing limitations to the charging of flat fees and propose to move to a universal charging structure in the future.
A broad scope
Following the publication of its Review of the Default Fund Charge Cap and Standardised Costs Disclosure in January 2021, the Department for Work and Pensions (DWP) is consulting on the policy required to implement the introduction of a ‘de minimis’ threshold, below which pension providers cannot charge members the flat fee element of the combination charge.
The introduction of a de minimis fund is aimed at protecting against the erosion of small pension pots due to the application of charges.
Whilst protecting members, the Government must balance the financial sustainability of scheme providers. It was therefore agreed that setting the de minimis too high may affect the financial viability of flat fee providers. Successfully striking a balance between these objectives would help to maintain public confidence in automatic enrolment and workplace pension saving.
De minimis
The previously mooted plan to introduce a tapering system for combination charges has been dismissed as it was felt that such an approach may add complexity for both members and providers.
As a consequence, the Government is proposing that the de minimis fund value will initially be set at £100 and will only relate to the flat fee component of the combination charge.
It is important to note that the de minimis test will be applied at provider level for both active and deferred members. Therefore, if a member has funds held by more than one pension provider, for which a flat fee is chargeable, the de minimis will be applied according to the fund value held by each provider for that member.
To recoup the loss in revenue from the introduction of the de minimis, affected providers may have to increase charges for members with pots above £100. Where the ratio of inactive pots to active pots increases, active pots may need to support inactive pots which would again lead to an increase in cross-subsidies.
Universal charging structure
The Government has taken this opportunity to also seek views on the broader direction they should take on the future structure of charges that are permitted within the charge cap.
The proposed future move to a universal charging structure would see the current three permitted charging structures within a default fund arrangement moved to a single charging structure under which combination charging would no longer be permitted.
The single permitted charging structure would allow a single percentage annual management charge based upon the value of a member’s pension pot.
The stated aim of a universal charging structure is to increase comprehension of charges and member engagement.
Following their review, the DWP believe that the current charging structures impose a barrier to members understanding and comparing the costs of their pension with other schemes.
Future steps
Once the consultation closes on 16 July, the feedback will be analysed, and the Government will then publish their response later this year. It is envisaged that the legislation required to implement the de minimis will come into force in April 2022.