DWP to ban flat fees for small pots

The move was announced on Wednesday in the government’s response to the review of the default fund charge cap and standardised cost disclosure, in which it was also announced that there will be no changes to the charge cap of 0.75 per cent, and that transactions costs will remain outside of this fee.

The government first proposed the ban on flat fees in June 2020 in response to industry concern about the deleterious effects flat fees and admin costs have on small pots.

Small pots are themselves thought to present severe challenges to master trusts, and to the success of auto-enrolment as a whole.

Over time a better solution would be needed to make sure that very small pots get consolidated into larger pots, and DWP needs to drive forward in this area

Tim Box, LCP

Their depletion by charges and administrative fees has long been a serious problem for members, who can in some cases see them eroded away entirely over the course of their careers, at a cost to the individual of hundreds of pounds of savings.

In his foreword to the response, pensions minister Guy Opperman wrote: “While automatic enrolment has been a huge success, some people — particularly those on the lowest incomes — are changing jobs more frequently, with a resulting increase in the number of deferred small pension pots.

“I am committed to limiting the erosion of the value of small pots, where flat fee charges risk depleting deferred pots to zero. Nobody should be automatically enrolled, only to find their hard-earned pension savings significantly reduced by charges.

“Therefore, I will be introducing a minimum level initially set at £100, before a flat fee element of a charging structure can be applied to these pots. I will keep the amount of the minimum level under review with a view to raising it at some stage in the future.”

Though this set of proposals is designed purely to limit the damage done to members’ savings by flat fees and administration costs, the government’s response noted the “strong support for addressing the wider issue of small-pot proliferation”.

The proposals are now expected to be put out to further consultation in the coming weeks.

Ban welcomed, but long-term solutions preferred

A range of industry figures welcomed the ban on flat fees, but suggested it was not an ideal solution for the long term.

Tim Box, senior consultant in the pensions research team at LCP, said the ban would likely benefit millions of savers, given recent research by the small pots working group that found that 25 per cent of deferred pots held less than £100.

However, he added that “over time a better solution would be needed to make sure that very small pots get consolidated into larger pots, and DWP needs to drive forward in this area”.

Steven Cameron, pensions director at Aegon, sounded a similar note: “Banning flat fees whenever an individual’s fund is under £100 will help. But longer term, it would be far better to find ways of making sure small ‘frozen’ pots left behind when changing jobs are joined up with the individual’s other pensions.” 

Mr Box further welcomed the unchanged charge cap, noting that it shows “providers have been working hard to reduce costs for commercial reasons”.

He said: “Keeping the cap at 0.75 per cent retains scope for providers to offer innovative investment solutions (such as in illiquid assets), which may cost more but are likely to deliver better member outcomes in the long term.”

Master trusts to change fee structures?

Now Pensions is thought to be one of the master trusts that could be forced into changing its fee structure as a result of the new ban. 

As Pensions Expert has previously reported, the provider charges an admin fee of £1.50 a month, in addition to a 0.3 per cent annual management charge.

In response to criticism from MPs on the Work and Pensions Committee, the provider has argued previously that separating the fees was a more transparent approach.

Adrian Boulding, director of policy at Now Pensions, said at the time that the mechanism proposed by the DWP in its consultation should only apply to “small pots that fall into cracks” and cannot be reunited with their owners.

Following the government’s response to the consultation, Mr Boulding said: “The announcement by government that small pension pots worth less than £100 should not be charged administration fees is an important step in the maturing of the pensions landscape, and one which Now Pensions will support in the forthcoming consultation.”

He added that advice to members has not really changed, with consolidation remaining the best solution for small pots. 

“Consumers should be aware that often the best value home to consolidate your multiple pots into will be one of your existing workplace pensions,” he said.

Asked whether, given its stated support for the government’s proposals, Now Pensions would be changing its fee structure, Mr Boulding told Pensions Expert: “The next step is a government consultation, which will start in the next few weeks and run for a couple of months, so until government concludes that we can’t make decisions. 

“We will then need to give employers six months’ notice of any changes,” he added.