Personal Finance

U.K. Work and Pensions Committee warns fees could undermine automatic enrolment objectives

The U.K. Work and Pensions Committee has warned in a report that permitting higher charges could erode small defined contribution plans, undermining the objectives of automatic enrolment

The U.K. Work and Pensions Committee warned in a report published Monday that permitting higher charges has the potential to erode small defined contribution plans, undermining the objectives of automatic enrolment.

The fee set in the U.K., capped at 0.75% of assets under management and administration for defined contribution plans, did not cause charges to rise, according to the committee’s evidence. However, a combination of a flat fee plus a percentage of funds under management, lobbied for by the industry, would increase the costs for smaller plans, the committee said.

The committee also said it wants better cost scrutiny across the pension industry, including defined benefit funds, where many plans are in deficit.

The report said that they have received worrying evidence that some trustees are making investment decisions without a clear understanding of how much those decisions cost. It does not appear that these are isolated cases.

The committee said it did not see evidence that higher-cost providers provide better performance but acknowledged the benefits of investment in infrastructure, diversifying portfolios and matching long-term investments to long-term savings.

The report stated that they are encouraged that the (U.K.) minister is seeking solutions better to enable investment by defined contribution schemes in infrastructure and other illiquid assets whilst not fundamentally undermining the charge cap.

Welcoming the money management industry’s effort, the Cost Transparency Initiative’s cost disclosure initiative, which is aimed at standardising cost disclosures through one template, the committee recommended that the government pass laws to make the templates mandatory for both defined contribution and defined benefit funds and review the level of a charge cap and permitted charging structures in 2020.

The committee also welcomed the U.K. Financial Conduct Authority’s proposal to create investment pathways as plan participants enter retirement, recommending that decumulation products also apply a fee cap. In an earlier proposal, the U.K. financial services watchdog said plan sponsors should auto-enrol plan participants into decumulation arrangements in the same way as they do for accumulation.

It recommended that a 0.75% charge cap should be set on decumulation products available through FCA decumulation pathways from the outset.

However, it said the investment pathways must not be a substitute for guidance.

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