The 0.75 per cent charge cap on default funds in auto-enrolment schemes will remain the same, Minister for Pensions and Financial Inclusion Guy Opperman has confirmed.

In a written statement today, 16 November 2017, Opperman stated that the government has now completed its examination of the cap to member-borne charges in defined contribution default funds. Following its consideration of industry and consumer views, as well as a recent Pension Charges Survey, which obtained data from 14.4 million members, the DWP noted it does not feel that now is the right time to alter the cap.

“The cap is working broadly as intended, helping to drive down member-borne costs, whilst allowing flexibility to allow asset diversity or tailored services for members and employers.” Opperman said.

Furthermore, the Minister highlighted his plans to build on the transparency of transaction costs as their opacity have “hindered” trustees and Independent Governance Committees’ attempts to assess their value.

“We believe that it is vital to get disclosure right before deciding on whether a cap on transaction costs is appropriate. Recently announced DWP legislative proposals will ensure trustees have sight of these costs and can give that information to members. The FCA is developing similar rules for providers.

“The Government remains committed to ensuring AE members are protected from unreasonable and unfair charges, and recognises that there is on-going concern amongst consumers,” he added.

Opperman concluded hinting at a possible change to the charge cap in 2020, when the department intends to examine its level and scope. “Whilst we are not pre-judging the decision, we expect there to be a much clearer case for change in 2020.”

On the announcement, Royal London director of policy Steve Webb commented: “This is a welcome and balanced decision by the DWP. The charge cap was only introduced a few years ago and sought to strike a balance between protecting members against excessive charges whilst allowing for diversity amongst pension providers and avoiding a ‘race to the bottom’. In practice, many millions of workers already face charges well below the charge cap, and automatic enrolment remains a hugely attractive way of saving for retirement. With employee contributions benefiting from tax relief and often matched by employer contributions, the current system is providing good value for money for the vast majority of pensions savers.”

Moreover, Webb added: “We also support calls for greater transparency and consistency over disclosure of transaction costs. It would be premature to expand the scope of the charge cap to include such costs when their nature and level is still not clear. We urgently need the adoption of simple and consistent measures of transaction costs so that trustees and governance committees can make sure that providers are providing value for money to scheme members”.

AJ Bell senior analyst Tom Selby also commented: “If the government decides to lower the cap [in 2020] it will presumably do so in a way that ensures NEST, the scheme established by the state to support auto-enrolment, isn’t caught out. It would certainly be no surprise to see the government push for a 0.5% charge cap ahead of the scheduled 2022 general election to show that it remains on the side of hard-working savers.

“Policymakers may also want to expand the scope of the cap by including transaction costs. At the time of the original charge cap consultation the industry successfully lobbied against the incorporation of transaction costs, with industry figures arguing they are unavoidable.

“It also remains unclear how transaction costs, which are inherently unknown, would be quantified for the purposes of a cap, and the government would have to be careful not to dissuade fund managers from making trades in members’ interests for fear of breaching the cap. However, work is ongoing to improve disclosure of transaction costs and this will inevitably hold huge sway in informing any decision in relation to the cap.”

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