The Government is facing calls to clamp down on “blended” fund charges following the decision to ban consultancy charging for automatic enrolment.
Some providers allow employee benefit consultants to be paid for constructing a default fund on behalf of an employer by increasing the annual management charge paid by members. These are known as blended fund charges.
The extra charge, which experts say is usually between 8 basis points and 15 basis points, is then rebated to the EBC by the provider.
Earlier this month, the Department for Work and Pensions confirmed consultancy charging will not be permitted for auto-enrolment, however it did not set out what falls under the definition of a consultancy charge.
Legal & General pensions strategy director Adrian Boulding says: “The serious issue with blended funds is there is an ongoing revenue stream going to the investment adviser which is providing that service. To me that sounds like a consultancy charge and we should find a way to disclose it as such.
“The obvious solution is to have the FCA regulate the provision of advice to employers.”
Aviva corporate benefits head of policy John Lawson says: “If the DWP includes blended fund charges in its definition of a consultancy charge it will be a massive issue for some EBCs.”
Capita Employee Benefits and Towers Watson say they do not operate blended fund charges, while Mercer refuses to confirm whether it uses the charging method.
A DWP spokeswoman says: “This is not a priority area for us but we are still developing the detail of the regulations. Employers need to be able to understand what charges will be levied and what this price includes.”