Draft regulations to cap defined contribution (DC) pension scheme charges at 0.75% have been put before Parliament alongside additional governance requirements.
In April, scheme charges will be capped at 0.75% unless employees have specifically chosen a more expensive option.
According to figures from the Department for Work and Pensions (DWP), the cap could save DC scheme members £100,000 over the course of their working life, based on an average earner currently paying into a fund with a charge of 1.5%.
In its response to a consultation on the introduction of a 0.75% cap on default funds, the government will now allow employers to breach the cap if defaulting members into schemes with life insurance contracts attached.
Employees with life cover written into their pension scheme will benefit from the change.
The DWP said in its response: “We have decided that those costs which are solely associated with the provision of death benefits should be excluded from the definition of charges subject to the cap in regulation.
“No member agreement will therefore be needed to provide these benefits, [because] charges associated with their provision will not count towards the level considered for the purposes of the cap.”
The cap will also not apply to money purchase schemes with a guarantee but trustees’ fiduciary duties should not mitigate the risk of schemes using low value promises to evade the cap.
The Financial Conduct Authority has also made corresponding rules to control charges and the introduction of Independent Governance Committees for workplace personal pension schemes from April 2015.
Pensions minister Steve Webb said: “It is vital that workplace pension schemes are run in the interests of their members and that their hard-earned savings are not eaten away by excessive charges.
”This is why we are building a pensions system that these workers can save into with confidence and not see their money disappear in opaque charging structures.
“There is an understandable buzz around what April will bring for those retiring now, with the pension freedoms coming in. But these reforms show we are also determined to help the pensioners of tomorrow, people working hard and saving hard for their families’ future.”
Richard Wilson, policy lead for defined contribution at the National Association of Pension Funds, added: “With only eight weeks to go until both the charge cap and the pension freedoms reforms come into force, the NAPF remains concerned about the last-minute publication of these final regulations on both the charge cap and the expected regulations on signposting to guidance for trust-based schemes.
“This is very unhelpful for pension schemes that want to keep costs down, develop and test systems in a timely manner and manage a smooth transition. We are concerned good-quality pension schemes risk being punished as a result.”
We welcome the close of this consultation exercise and are glad to see the regulations at last – although the industry and trustees now have just ten weeks to work towards compliance, which is going to be tough. The delay aside, we think the regulations look good. On the whole they are balanced and take into account the points raised during consultation and we believe they will be effective in supporting good member outcomes.
Amongst other things, the regulations require trustees to carry out a good value assessment on all costs and charges, and also require the disclosure of the results of that assessment. While we support the principle of what is required, we do have a couple of concerns. Firstly, good value isn’t defined in the regulations nor is it defined elsewhere in statute, case law, practice or academia. While the concept is widely accepted, its definition is subjective and individual so, as a consequence, what is being enshrined in law is an obligation to assess a concept that isn’t defined. This is bound to lead to litigation.
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