A ban on combination charging structures could cost pension savers £1,000s

The government is reviewing plans to introduce a universal single annual management charge for all automatic enrolment pension schemes. In November last year (2021), the results of the Consultation on Permitted Charges within Defined Contributions Pension Schemes were published by the Department for Work and Pensions (DWP). The results confirmed the ban on levelling cash charges on pots worth £100 or less. At the same time, the DWP, which had also consulted on the idea to introduce a single universal annual management charge for workplace pension schemes, announced it would propose next steps on this issue ‘shortly’.

A service that works for our members

While we agree with the government’s good intentions to provide greater clarity and transparency for customers when comparing charges, we don’t think the introduction of a universal single charge is the best way to do it. Pension providers like us have, over time, created a service that works for our members. A little over 2 years ago we introduced a new combination charging structure for our 5m plus members. Any moves to introduce a flat fee for all auto-enrolment schemes would mean our combination charging structure would be outlawed, as it includes a rebate on the 0.5% management charge and a cash charge. This rebate begins once a saver has £3,000 or more in their pension pot, and it increases the more they save.

We think this charging structure works for our membership. We’re a not-for-profit organisation, which means we focus on making things easier and fairer for our members rather than worrying about paying profits to shareholders – we call it ‘profit for people’. We give back a total of more than £1m a month to a considerable proportion of our members, and we’re proud of this. As auto-enrolment matures, this figure is only set to grow, and based upon current charges, we estimate this figure might rise to £34.5m a year in just 5 years’ time.

An additional 3 years’ retirement income

Based on the current combination charging structure, the average earner, saving over their working life with The People’s Pension, could see their lifetime annual management charge eventually fall by more than half to just 0.23%. But if the government implements a universal charge, they could potentially lose out on almost £27,000* – around an additional 3 years’ retirement income.

When we introduced our charging structure in 2020, fairness was a motivating factor because we wanted to reduce the cross subsidy of small, dormant auto-enrolment pots for members who have accumulated a larger pension. 

Bringing in a universal charging structure only for automatic enrolment pension providers would distort the market and put the millions of people saving through auto-enrolment at a disadvantage compared to those saving through retail schemes. This could lead to some workplace schemes increasing their charges for all members.

Our view is shared across the industry

We know that our view is shared across the industry; respondents to last year’s consultation cautioned that the change could lead to fewer providers offering pensions in the auto-enrolment market, which would consequently lead to a reduction in investment offerings.

There are numerous ways to solve the perceived problem of transparency within workplace pensions but banning combination charging structures like ours isn’t one of them. We think that this would be unfair to hardworking savers by removing incentives to save more for retirement, not to mention unfairly targeting auto-enrolment savers.

Patrick Heath-Lay, Chief Executive Officer at B&CE, provider of The People’s Pension

*Assuming a member aged 23 with a starting fund of £15,000, a salary of £30,000 per year, paying 8% gross contributions, investment returns of 5% per annum, inflation of 2.5% per annum, and a retirement age of 68, this could add up to an extra £26,853.11.