Charges Cap Proposed for DC Schemes

Introduction

The OFT’s market study published in September 2013 found that competition alone cannot be relied upon to drive value for money for all savers in DC workplace pensions, because of weakness on the buyer side of the market and the complexity of the product. As part of the study, the OFT reached agreement with business and TPR on a set of reforms to DC workplace pensions but stopped short of recommending a cap on charges.

The DWP has now published a consultation on capping charges. The consultation closes on 28 November 2013.

In this Alert:

• Proposed cap on charges
  
• When will the cap apply?
  
• Further action on charges
  
• Next Steps
  
• Legacy Schemes
  

Proposed cap on charges

The DWP’s consultation asks for views on whether a cap on charges in default funds should be introduced. The consultation sets out three options for a cap.

• Option 1 – a charge cap of 1% of funds under management
• Option 2 – a lower charge cap of 0.75%
• Option 3 – a two-tier “comply or explain cap”, which would comprise a standard cap of 0.75% which could be increased to 1% for all employers who are able to explain to TPR the reason for the charges in excess of 0.75%.

When will the cap apply?

The proposal is that the cap should be introduced for all members, both active and deferred, of default funds in qualifying DC schemes (namely, used for automatic enrolment) for those employers staging from April 2014. The cap would then be extended by April 2015 to all employers who have staged since the introduction of automatic enrolment in October 2012.

Further action on charges

The DWP is also asking for views on whether:

• differential charging between active and deferred members (often called Active Member Discounts or AMDs) should be banned
• the ban on consultancy charges introduced in September 2013 should be extended to all qualifying schemes – at the moment it applies to just automatic enrolment schemes
• adviser commissions set up prior the introduction of the Retail Distribution Review on 31 December 2012 should be banned in qualifying schemes.

Next Steps

• Employers with automatic enrolment staging dates from April 2014 will need to take these proposals into account when choosing DC schemes.
• Employers and trustees should review the charging structure of existing automatic enrolment and qualifying DC schemes in light of the consultation, but under the current proposals they will have until April 2015 to comply.

Legacy Schemes

In addition, the DWP has said it will consider whether any further steps are required as a result of agreed action by the ABI and TPR on legacy schemes (to address the OFT’s concerns about old and high charging contract and bundled trust schemes and small schemes delivering good outcomes). The ABI and its members agreed with the OFT to an immediate audit of these schemes, aimed at ensuring savers are getting value for money and TPR are looking at small trust-based schemes at the moment.