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. 

A review of pensions policy in 2021

Many of the policy changes discussed in 2021, like pensions dashboards, will be difficult to accomplish but will bring real improvements for savers. We have more questions about other initiatives, but have no doubt the Department for Work and Pensions (DWP) is trying to improve the UK pension system.  

Pensions dashboards

Big projects, like the pensions dashboards have seen major progress this year. The main contracts for the systems that will make the dashboards work have been issued by the Money and Pensions Service and they are progressing towards staging schemes on dashboards from early 2023.

Most of the legal and regulatory rules that will underpin how dashboards work have yet to be published, so there is still much to do. Similarly, we haven’t seen the application programming interface (API) that will be used to link together pension scheme member databases and the dashboards information architecture. It’s imperative that schemes get confirmation on the final requirements as soon as possible so that preparation can begin in earnest.

Small pots

In late 2020, the DWP working group produced a report recommending that the industry look at the policy and administrative issues around automatic consolidation of small pots. So, this year there has been further investigation into the small pots issue. And now following a report by the Pensions and Lifetime Savings Association (PLSA) and the Association of British Insurers (ABI) working group, there is a need for further action by policymakers. It is likely we will need legal and potential primary legislation to make small pot consolidation a reality. We hope that both the government and the industry will return to the table in 2022.

Communications and engagement

We now have final regulations for the simpler annual benefit statement.

The statement is now a known quantity. For most people, it’ll be a clear and standard-comparable document. For some (potentially those with more than one job or a protected pension age) it may look different, but not significantly so.

Investments

On investments, we have seen a renewed focus on investing in illiquid assets. Much of the government views rapidly growing DC funds as an easy source of capital for national economic priorities.

Measures like changing the charge cap are being suggested, which we see as ineffective. But other measures, like a new fund structure, are more likely to enable greater diversification in how DC funds invest. Broadly, we see investment in unlisted assets as potentially desirable given the large body of work showing an illiquidity premium for the schemes capable of capturing it.

The market for workplace DC is, however, very price-sensitive. Investing in unlisted assets is typically much more expensive than investing passively in listed equities and changing scheme asset allocations to invest in unlisted assets would most likely pass through to member charges.

Value for money

Which brings us to The Pensions Regulator and the Financial Conduct Authority framework for value for money. Making the workplace pension conversation about value, rather than just charges, is a sensible aim. Initially, the regulators’ value-for-money framework is intended to help pension professionals assess value, but, in time, we expect metrics to be developed that are consumer facing.

Our view is evolving. The focus on the proposed framework consultation paper in judging the quality of scheme oversight, investment and costs and charges is mainly right. The Pensions Policy Institute’s recent piece on the global experience of value for money also highlighted the importance of governance as a theme. It’s something we hope both regulators will return to.

So, while we expect 2022 to be equally busy, the hope is that policymakers keep the bigger picture in mind. 

Tim Gosling, head of pensions policy at B&CE, provider of The People’s Pension