Parliament moves to ban flat fees on small pots

The move comes almost exactly a year since the Department for Work and Pensions formally proposed the ban in response to the review of the default fund charge cap.

At that time, research from the Pensions Policy Institute estimated that the number of small, deferred pots in master trusts could surge from 8m to 27m by 2035, with the cost to members in fees and other charges reaching £1.2bn, in some cases wiping out small pots entirely.

While the industry was broadly supportive of the plan, several commentators have argued that it is a short-term fix that should not be seen as a substitute for measures to deal with the long-term problems posed by small pots.

In November 2021, when the DWP confirmed it was moving ahead with the proposals, Aegon pensions director Steven Cameron branded it a “symbolic gesture” that, while “understandable”, would make little difference to members in retirement.

“The decision means that those firms who have offered this choice of charging to employers, in return for a lower fund-based charge, will now need to update systems and communications ahead of the April 2022 introduction,” he said at the time.

“This will take resource away from many other, more important developments such as preparing for pensions dashboards. Bearing in mind flat fees where they exist are typically small, the monetary impact on individuals of a year’s delay would also have been very small.”

Also in November, the PPI warned that a combination of the flat fees ban and an increase in scheme consolidation, which the government is also pressuring, could in fact reduce value for money.

In a report sponsored by B&CE, provider of The People’s Pension, the PPI suggested that the cost of the ban may need to be subsidised by increasing charges on large pots. However, some master trusts have already pre-empted these changes, including People's Pension, who started applying the new rules in October without making changes to its charging structure*.

The ban is intended to come into force in April 2022, and will apply to both active and deferred pots held within the default arrangement of certain occupational schemes. 

Commenting on Monday, pensions minister Guy Opperman said: “Automatic enrolment has truly revolutionised pension saving in the UK. More than 10m people have been enrolled into a workplace pension, with an additional £28.4bn a year being saved since 2012.

“By removing flat fees on pension savings worth less than £100, we’re protecting savers, particularly those who regularly take on short-term work or change jobs frequently, and helping them build for their financial futures.”

*This article has been corrected to reflect The People's Pension will not be making changes to its charging structure to account for the ban