It’s how you manage charges – not where you cap them..

an ill-fitting cap

We are to go through another consultation on how charges in workplace pension defaults should or shouldn’t be capped. The consultation will end in January, a window short enough to make the proposals we had yesterday a “fait accompli”. The issue is no longer about the charge cap but how costs and charges are managed to improve value for members.

At the time of the cap’s introduction, the governance of workplace pensions was patchy. We had no master trust assurance framework, IGCs or GAAs. We were absorbing the impact of the retail distribution review which was drove advisers away from workplace pensions and into wealth management. The pension charge cap nailed down the lid on third party distribution of workplace pensions and made it easier for employers to buy with confidence.

But since 2015, workplace pensions have developed much stronger governance . Weak master trusts have been bought out by stronger ones and a new breed of trusts , funded by insurers and consultants are competing for business on a much wider value proposition than the headline AMC.  Charges are being kept low because workplace pensions are being judged on outcomes, not promises.

The DWP’s charge cap consultation is entitled

Enabling investment in productive finance

It’s title suggests that the charge cap is pretty well an irrelevance, relative to the broader goals of the Johnson/Sunak investment big bang, the achievement of  ESG targets and the improvement of member outcomes.

We have not seen an attempt (yet) to require defaults to be managed as “productive finance” but there is urgency within the DWP, to ensure its regulator enforces compliance with a range of new reporting measures. These lead trustees to the conclusion that there is little alternative but to play to big Government’s agenda.

What this consultation is doing, is kicking away the argument that might be used against investment in private and illiquid markets, that such investments can generate spikes in fees to fund managers, intent on being rewarded to the maximum.

But that argument has been sidelined because trustees and their advisers now see their role as curbing the excesses of the fund managers packaging such investments and ensuring that they can see both what they are paying and what they are paying for.

At a conference yesterday afternoon we heard from governance supremo Sarah Wilson that “an absence of data is data”. In other words, managers who do not provide such information become “no go managers”, investments made by such managers which don’t provide proper reporting become “no go investments”. The implication for fund managers and for private companies is “If we don’t get a report, you don’t get our money”. That goes for equity and debt finance.

To a large extent, the new world of good governance makes the charge cap irrelevant. Transparent reporting at the most granular level enables trustees , advisers and scheme funders to manage investments on a value for money basis.

And we shouldn’t forget that the cap, as introduced by Steve Webb in 2015, has not been inclusive; the DWP’s consultation reminds us that it excluded

  • transaction costs (costs incurred as a result of buying, selling, lending or borrowing investments)
  • the amount of any costs incurred in complying with a court order, where the court order provides for the trustees or manager to recover those costs
  • charges in respect of pension sharing on divorce orders, permitted by regulations made under section 24 or 41 of the Welfare Reform and Pensions Act 1999
  • costs of winding up the pension scheme
  • costs solely associated with the provision of death benefits
  • costs solely attributed to holding physical assets, such as land or buildings

To these costs we can include the impact to members of the “single swinging price” at which units are bought and sold, which doesn’t just crystallize when money is drawn out of pensions but when units are bought and sold in a lifestyle matrix. Large well run schemes are able to mitigate such costs but many smaller workplace pension schemes can’t and don’t. Members can lose a heap of value through automatic switching , none of which is recorded within the charge cap.

So not only is the charge cap less important because of good governance, but it always has been a very loose control of the costs and charges paid by a member. In reality, the cap has been more of a deterrent than a governance tool and in deterring bad practice, it has done its job. But going forward, we are moving on. Value for Money now needs to be the measure by which we judge our pensions and price comparison is only one aspect of that.

If we have confidence in the governance of our workplace pensions, and I think we should have, we can kick away the scaffolding of the charge cap. Our default investment strategies do not need to be supported in this way, we have moved on.

It’s how you manage charges , not where you cap them, that is the measure of value,

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions. Bookmark the permalink.

2 Responses to It’s how you manage charges – not where you cap them..

  1. John Mather says:

    Control may well kill innovation

    Charging and waterbed analogy is a good one but going outside equity/ bonds/cash is becoming more difficult.

  2. Martin T says:

    I’m not sure what is meant by “productive finance” and why it is better used than the money we lend business in corporate bonds or invest in shareholdings.

    How can green bonds or other infrastructure projects where the greenium drives the real rate of return significantly below conventional investments (which may nevertheless have strong ESG credentials) be in the members best interests?

Leave a Reply