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Mark Pearson: Capping charges is fraught with difficulty

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Along with everyone else advising in the workplace pensions market, we are waiting for the Department for Work and Pensions to publish the detail following the recent consultation on charging.

Although Steve Webb said last week any charge cap will be delayed until April 2015, the Pensions Institute report on the effect of charges within DC schemes, Assessing Value For Money in Defined Contribution Default Funds,  makes interesting reading.

A key finding is that the investment strategy of a default fund is of less importance to member outcomes than charges. It finds no evidence that paying higher charges for a more sophisticated investment strategy will deliver superior performance. 

This leads the report to conclude that a TER in excess of 0.5 per cent may not deliver value for money.

If, as the report suggests, pension charges are the biggest factor affecting the final fund members ultimately receive then capping charges on default funds makes sense.

But capping charges for the new spate of AE schemes being created will only go so far – you need to look at pension funds members have accrued elsewhere. 

We know the industry is currently reviewing all pre-2001 contract-based DC schemes amid the concern over high charges raised by the OFT. The Pensions Institute proposes this audit applies to all schemes written before January 2013 – the entire DC workplace market – and the review is undertaken by the regulator not by provider committee.

This would highlight many schemes where the TER is above the charging range now considered acceptable – but we should recognise that these schemes were created and priced in a very different world.

Also within the Pensions Institute report: legislation should be introduced to allow the mass transfer of contract based scheme members into new arrangements without individual member consent.

If so how will this be used in the workplace pensions marketplace? And who is going to pay for this?

The DWP seems to be set on the path that complying with auto-enrolment regulations is an employer expense. This would, I assume, include any costs incurred by performing a bulk member transfer to a new scheme. The expectation seems to be that more employers will deal directly with a product provider or master trust scheme; would this bulk transfer rule change let the employer agree a process where all legacy assets can be automatically migrated to the new scheme? 

Would this bulk transfer process then need to be replicated in the future every time a cheaper solution becomes available?

Mark Pearson is business development director at Origen Financial Services

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