IMploy | Proposed Cap On Pension Charges – Do You Need To Review Your Defined Contribution Schemes?

Proposed cap on pension charges – do you need to review your defined contribution schemes?

On 30 October 2013, the Department of Work and Pensions issued a consultation on pension schemes charges. In the consultation, the DWP attempts to address what it perceives to be market failures in relation to defined contribution (“DC”) workplace pensions. 

The DWP believes that the risk that individuals may face high charges “grows for those employed by SMEs, whose schemes typically have higher charges”. The DWP’s view is that the complexity of DC workplace pensions as a product also makes it difficult for employers to carry out comparisons of costs and quality.

The proposals under the consultation do not currently cover all DC schemes. However, the Government is considering extending the cap to all historic DC schemes. The consultation regards the introduction of a cap on charges in relation to the default funds in so-called qualifying schemes.

Three alternatives are being considered for the proposed charge cap:

  1. A cap of 1% of funds under management.
  2. A cap of 0.75% of funds under management.
  3. A two-tier ‘comply or explain’ cap.

Under the third option, a cap of 0.75% would apply, unless the employer could explain why charges exceeded this level, in which case a cap of 1% would apply.

It is proposed that a cap would initially only apply in relation to those employers who reach their staging date from April 2014 onwards, although it would subsequently be extended to cover all employers.

To prepare for the likely introduction of a cap, employers may wish to review the level of charges which apply in relation to their chosen qualifying DC schemes. The proposed changes may mean that certain employers will have to enter into discussions with providers to amend the charging structure, or may even need to make alternative arrangements with another provider.

There are additional proposals contained in the consultation, including a ban on so called “active member discounts” which results in a differential charging between active and deferred members. This means that the charges paid by an individual who has left employment can often be higher than those paid by those who remain in employment.

- Chris Widdison