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Home / News and Insights / Blogs / Pensions / 54: DWP publishes consultation on universal charging structure for DC auto-enrolment schemes

The DWP has published a consultation, ‘Permitted Charges within Defined Contribution Pension Schemes’, seeking views on two aspects of charging structures for default funds in qualifying DC schemes used for auto-enrolment. Responses must be submitted by 16 July 2021.

Currently, funds subject to the DC charge cap can apply charges in one of three ways: a flat fee of no more than 0.75% pa, a combination of a flat fee and a charge on contributions paid, or a combination of a flat fee with a percentage of funds under management charge.

First, the consultation seeks views on draft regulations to ban flat rate fees on default fund pots worth £100 or less, expected to come into force on 6 April 2022 (draft ‘Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2021’).

This follows a review of the default fund charges cap published in January 2021 in which the DWP set out its intention to introduce a de minimis pot size below which flat fees cannot be charged, in order to protect savers from the risk of savings being eroded by excessive charges. This is becoming an increasing problem due to employees changing jobs more frequently, leaving small pension pots with no ongoing contributions.

The ban will apply both to single flat fee charging structures and the flat fee element of a combination charging structure and will apply to all members’ pots, whether active or deferred. The de minimis level will be kept under review, with a view to raising it above £100 at some stage in the future. Feedback is requested on the financial and other indirect consequences of the de minimis level.

The consultation is also seeking views on the broader direction the Government is planning on the future structure of charges that are permitted within the charge cap. It sets out a proposal to replace the current three permitted charging options for default funds of qualifying DC auto-enrolment schemes with a universal single annual percentage management charge, based on the value of the member’s pot. This would mean that combination charges would no longer be allowed.

In March 2021, the DWP consulted on draft regulations which would allow schemes to smooth performance fees, which are often payable on illiquid investments, over five years. It is hoped that this measure will encourage more trustees to invest in illiquid investments. Subject to the outcome of this latest consultation, it is proposed to bring the performance fees regulations into force in October 2021. The Government acknowledges that the performance fees proposals have ramifications for standardising charges, and this will be taken into account in formulating a universal charging structure.

Comment

The Government’s proposal to move to a single, universal charging structure has the aim of improving pension scheme member engagement and transparency over pension savings costs and performance. These considerations are also reflected in the proposals for standardised pension dashboards and simpler benefit statements – disclosure of information matters that trustees of occupational schemes will need to comply with in due course.

The consultation continues a constantly developing DC regulatory environment that has seen a significant increase in the governance obligations of trustees of occupational DC schemes. Many will already be discussing with sponsoring employers whether they should continue to offer an occupational DC scheme or whether to wind it up (strip out the DC elements of a hybrid scheme) and transfer the liability to another arrangement and of course many may wait to carry out their first value assessment before deciding on next steps.

In any event, trustees and employers of occupational DC schemes will need to keep an eye on developments in this area and continue to follow the relevant Pensions Regulator guidance on assessing and implementing charge caps.

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