The Department for Work & Pensions has issued a call for evidence to the pensions industry in relation to the charge cap that applies to some defined contribution schemes. The charge cap is an important regulatory tool for ensuring that member-borne administrative costs are fair and reasonable, and trustees of relevant schemes will therefore be interested in giving their views on the various proposals and the 18 specific questions posed by the DWP.

Background

The charge cap was introduced in April 2015 following a 2013 consultation amid concerns of excessive administrative charges for workplace schemes. For clarity, the cap only applies to the default fund of defined contribution schemes used for automatic enrolment. A cap equivalent to 0.75% of funds under management was set, alongside the introduction of a number of other measures including the simplification of permitted charge structures.

A follow-up review by the government in 2017 led to the cap remaining at the same rate, a decision based, in part, on the results of the 2016 Pension Charges Survey which found that the average charge for relevant schemes was between 0.38% and 0.54% and comfortably below the level of the cap.

Three key issues

This new call for evidence, which is due to be accompanied by a 2020 Pension Charges Survey later in the year, focuses on three key issues:

  1. Whether the rate and scope of the charge cap is fit for purpose - whether transaction costs and costs associated with the provision of non-standard add-ons (such as life assurance) should fall under the cap.
  2. Fee structures - whether flat fees should continue to be permitted at all or whether they can continue to operate with certain conditions attached to them (for example, a minimum pot size before they can be charged).
  3. The use of standardised cost disclosure templates by asset managers when reporting their costs to trustees, and whether these are being used effectively. The government is considering whether to legislate to require trustees to submit information about whether they have used the Cost Transparency Initiative ("CTI") reporting template as part of the registrable information submitted in the scheme return.

Whilst the purpose of the call for evidence is to garner the views of the pensions industry, it is helpful in revealing the leanings of the DWP itself on some key policy issues. For example, there is an indication that flat fees may not be banned outright, but that conditions may be introduced to limit their use. Similarly, the challenges of reducing the rate of the charge cap (in spite of the significant headroom referred to above) are highlighted, particularly in terms of the deterrent effect that may have on more ambitious investment strategies.

The charge cap has wide-reaching implications for the schemes to which it applies, including on investment strategy, scheme administration and management, and ultimately on value for money for members. In addition, the way in which those charges are disclosed to trustees is important. The information needs to be in a user-friendly format to allow trustees to use it to drive continuous improvements for members. This call for evidence is a valuable opportunity for interested parties to have their say on potential changes to it. Responses can be submitted by email to pension.charges@dwp.gov.uk and should be sent by 20 August 2020, with the DWP aiming to bring forward proposals later this year based on the evidence it receives. Gowling WLG will be responding to the call for evidence and if you would like us to include your comments in that response, please contact Joanne or Richard.

Please get in touch with us if you would like to discuss the charge cap and this call for evidence in further detail.