The government has announced plans to abolish flat fees on auto-enrolment pension pots worth £100 or less following a consultation on charge caps.

The announcement stated that this minimum would be kept under review with a view to an increase at some point in the future, while it also acknowledged that it would take the work of the Department for Work and Pensions' (DWP) small pots working group into account.

Additionally, the announcement confirmed that there will be no change to the 0.75 per cent charge cap for auto-enrolment pensions and transaction costs will not be included

Explaining the reasoning behind this decision, the consultation response cited the fact that the Pension Charges Survey 2020 had found all members in the qualifying schemes covered by this research were now below the cap and the average charge was 0.48 per cent across all members.

It added that some respondents had raised concerns about the impact of market uncertainties from events such as Covid-19 and the importance of affording schemes the flexibility of using headroom to deal with these challenges.

The DWP's Review of the Default Fund Charge Cap and Standardised Cost Disclosure was launched in June 2020 and ran through until August, seeking responses from trustees, providers, civil society organisations, scheme members and other stakeholders.

The ban is designed to protect small pots, which are often caused by savers switching jobs frequently and being automatically signed up to new pension schemes each time, from being eroded by providers’ charges.

However, the government said it would not be forcing pension companies to adopt new fee templates.

Smart Pension director of policy, Darren Philp, said: “We welcome the outcome of this consultation which limits the impacts of flat fees on members with the smallest pots. The introduction of the de minimis at £100 is consistent with what we currently have in place for our members and strikes a sensible balance between protecting the member and provider sustainability.

“The application of the de minimis to active members will need a lot of thought as it could be operationally complex as well as inconsistent with other industry charging practices, and we look forward to picking up on these issues during any consultation on the implementation.”

Now: Pensions CEO, Patrick Luthi, said the move was “an important step in the maturing of the pensions landscape”, adding that implementation of the change would need “careful thought and communication to employers and members”.

He added: “Importantly, the advice to members really does not change. Modern employment patterns are more dynamic and will create lots of small, deferred workplace pension pots, and the best thing to do is to consolidate them together to form a single, more manageable pension plan.

"Consumers should be aware that often the best value home to consolidate your multiple pots will be one of your existing workplace pensions.”

The Investing and Saving Alliance head of retirement, Renny Biggins, commented: “Good work is being done by the government and industry to find solutions, such as the recent DWP small pots working group, which we fully support.

"The pensions dashboards and other initiatives to boost consumer engagement will also help increase awareness of the potential impact multiple small pots can have, and should prompt individuals to look into the possible benefits of consolidating their pots for an optimal outcome.”

However, PensionBee chief engagement officer, Clare Reilly, called for the government to go further, commenting that the new measures did not go far enough “to prevent excessive charges and ensure hard working people retain as much of their retirement savings as possible” and highlighting the deferred pots created through automatic-enrolment.

She continued: “In order to address this problem once and for all and prevent savers from accumulating a number of small pots throughout their working lives, we are calling for a radical rethink of the system.

“We know that only when pots reach a value of over £4,000 do they become financially viable, so we must focus on simplifying the process of consolidating old pots with a pension switch guarantee, while stopping any further small workplace pots being created for savers already in the system.

“Consumers need to be able to easily and consistently identify what they have paid for their pensions and compare fees across all of their pots, yet at present this information (presented as a percentage or in pounds and pence) has been excluded from both the initial data standards guide for the Pensions Dashboards and the DWP’s plans for mandated simpler annual statements.

“It is therefore essential that the government prioritises bringing pensions into open finance so consumers can have much needed transparency on charges and understand which of their pots offer the best value for money.”

During the consultation period, opinion from the industry on changing the cap had been largely negative, with some calling for the 0.75 per cent charge cap to remain unaltered and arguing that stricter measures would restrain the design of default strategies and hamper defined contribution schemes’ efforts to invest more widely in environmental, social and governance initiatives.

The response to the consultation also hinted that the government may introduce legislation to improve cost transparency for pension savers in the future, noting that it intends to "closely monitor" the adoption of cost transparency initiatives in order to determine whether further steps are necessary.

The consultation response stated: "Throughout the pensions industry, there is an inconsistency around the charges information available to scheme members and members of the public. There is a lack of clarity on what charges members face and how they are calculated. This can make assessing value for money of the charges they pay, more difficult.

"With this in mind, we will explore how better standardisation of charges and how they are expressed can be introduced."

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