Almost seven million people are now members of defined contribution (DC) schemes through auto-enrolment. With DC forming the bedrock of many people’s retirement savings, building default funds that will deliver growth over the long term is vital.

At a recent DCIF round table, participants discussed current barriers to investment innovation and how these could adversely affect the eventual pension pots of members.  A major area of concern was the possible reduction in the level of the current charge cap as result of the recent DWP consultation.

At present, the cap on charges is 75 basis points. The DC trustees, consultants, investment managers and other experts around the table unanimously agreed that a reduction would result in less innovation.  Investment is often the first area of the scheme’s overall fee budget to be culled, so a reduction in the cap would mean members would face the risk of having less comfortable retirements.

The round table also warned that reduction of the level of the charge cap could be at the expense of members of certain types of pension schemes.  It was felt that smaller schemes would suffer more as the cost of administration would be higher, disproportionately eating into their budget and outweighing their ability to offer more sophisticated investment strategies with better diversification and volatility control.

Members of contract-based schemes and master trusts could also see worse outcomes. When employers choose a contract-based governance structure, or outsource their money to master trusts, all costs are typically presented as a single number.  These costs, which cover administration, governance and communication, are passed onto members.  At this level, basis points do really begin to bite so reducing the cap further risks little or no innovation in investment.

The recommendation from the group was that the current level of the charge cap should be preserved as a reduction would squeeze investment out of the equation at the expense of other scheme costs. At a lower price point, access to the whole investment universe would be impossible, leaving schemes with no option but to invest purely in passive, index-tracker funds. Panellists also warned that members of smaller schemes, even those with paternal sponsors, could suffer disproportionately if the level of the charge cap were to be reduced.

However, the current level of the charge cap was agreed to be sensible, giving schemes a clear framework to work within. The panellists also noted that innovation is definitely occurring and some schemes are taking the time to construct great investment solutions.

 

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