The Department for Work and Pensions (DWP) has launched a consultation into charges on workplace pension schemes.

Better workplace pensions: a consultation on charging, follows the Office of Fair Trading’s (OFT) market study into defined contribution (DC) pensions, which was published in September.

The DWP’s proposals include:

  • Mandating disclosure for pension scheme members to ensure a consistent approach across providers and schemes, and to improve the coverage to include all scheme members.
  • Standardising disclosure for employers to introduce a standard framework for the disclosure of costs, charges and the services provided both at the point of sale and on an ongoing basis.
  • Introducing a cap on pension scheme charges for all members, both active and deferred, of default funds in qualifying DC schemes for employers that stage from April 2014, before extending this cap to capture all employers that have staged from October 2012, up to and including March 2014, by April 2015.
  • A ban on differential charging between active and deferred members in DC qualifying schemes. This would address active member discounts.
  • The ban on consultancy charges should be extended from auto-enrolment schemes to all qualifying DC schemes.
  • A ban on adviser commissions set up prior to the introduction of the retail distribution review (RDR).

The proposal for the cap on pension charges has been split into three options: a charge cap of 1% of the funds under management, reflecting the current stakeholder pension cap; a lower charge cap of 0.75%, reflecting the charging levels already being achieved by many schemes; and a two-tier ‘comply-or-explain’ cap, which would set a standard cap of 0.75% for all default funds in DC qualifying schemes, while a higher cap of 1% would be available to employers that explained the reason for charges in excess of 0.75% to The Pensions Regulator.

The consultation opened on 30 October and will close on 28 November 2013.

Steve Webb (pictured), pensions minister, said: “In May, I signaled the government’s intention to consult further on the issue of charges in workplace schemes.

“As the Office of Fair Trading noted in its recent report, Defined contribution workplace pension market study, a weak demand side in a complex market has the potential to prevent some members from benefiting from price competition.

“While I am pleased that some large employers setting up schemes for automatic-enrolment are getting good deals for their employees, there is a real risk that SMEs [small and medium-sized enterprises] will struggle to negotiate the same low charges or will use high-charging legacy schemes. When small differences in charges can make a significant difference to final retirement incomes, this is an area where we cannot afford to be complacent.

“Therefore, through this consultation, we want to assess what can be done to improve transparency in pension scheme charges and to look at whether there is a role for the government in improving disclosure.

“We also want to test the case for capping default fund charges and have offered a range of structures to help tease out some of the various issues.”

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