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DWP faces predictable backlash over plans to water down pension charge cap

Tom Selby, senior analyst at AJ Bell
Tom Selby, head of retirement policy, AJ Bell
  • Proposals to water down the 0.75% automatic enrolment charge cap so performance fees are exempt are set to go ahead despite widespread industry concern (Facilitating investment in illiquid assets (publishing.service.gov.uk))
  • The Department for Work and Pensions (DWP) has also put forward plans to require pension schemes with more than £100 million in assets to explain their policy on illiquid investments
  • Some respondents argued excluding performance fees from the charge cap would not make a difference in trustees’ decision-making on illiquid investments, while others warned of the risks posed if members’ pots are exposed to high fees
  • Reforms intended to boost the amount of pension money invested in things like green infrastructure projects and start-up companies
  • Strong argument that auto-enrolment charge cap should be edging downwards as schemes benefit from economies of scale

Tom Selby, head of retirement policy at AJ Bell, comments:

“The Government faces a predictable backlash from various corners of the pensions industry over controversial plans to water down the automatic enrolment charge cap.

“These concerns are entirely justified – any move to exempt performance-based fees from the charge cap risks leaving members’ exposed to higher costs.

“Of course, cost is just part of the value-for-money equation, and the key is whether these investments can justify the associated extra fees. Policymakers clearly firmly believe illiquid investments can deliver better overall returns for members than more mainstream asset classes.

“While there is some evidence to suggest this could be the case, there are no guarantees and many trustees will understandably be wary.

“Ultimately trustees have a fiduciary duty to invest members’ hard-earned funds in a way that is most likely to deliver the biggest retirement pot possible. Just because the Government wants pension schemes to help the UK ‘Build Back Better’ doesn’t mean those schemes will play ball.

“Whether or not performance fees are eventually excluded from the charge cap, trustees will still need to satisfy themselves these investments are appropriate for largely disengaged members who end up in their auto-enrolment ‘default’ fund.”

Shouldn’t pension charges be going down rather than up?

“It does seem slightly odd that, with auto-enrolment schemes seeing their assets under management swell with the retirement funds of over 10 million workers, the debate is now focused on exempting performance fees rather than reducing charges.

“Economies of scale should mean that as assets under management rise, the percentage costs of investment managers administering those assets fall. Logically you would therefore expect the pressure on the charge cap to be on the downside.

“The danger is that in aggressively pursuing investments in illiquid assets, the Government is taking its eye off one of the key elements of value-for-money investors can control – cost.

“While 0.75% might be an appropriate level of charge cap for now, the competitive dynamics in the auto-enrolment market remain weak. It is entirely possible that developments in the market will mean that a 0.75% charge is viewed as excessive in 5 or 10 years’ time.

“For the benefits of economies of scale to be passed on to members – rather than swallowed up as extra profits by fund managers – it is vital charges remain front-and-centre of the value-for-money debate.”

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