Lane Clark and Peacock (LCP) has called on the government to abolish monthly flat fees on defined contribution (DC) pension pots, arguing that these can erode small pots and have a particularly adverse effect on women.

In its response to the Department for Work and Pensions (DWP) consultation on the automatic enrolment charge cap, the firm argued these fees can steadily run down small pension pots, particularly those left behind after changing jobs.

The firm stressed that, in extreme cases, these costs could reduce the pension pot balance to zero, which is both unfair to members and creates reputation risk to the industry.

It also emphasised that member borne flat fees are “particularly detrimental” to the low-paid and part-timers, highlighting that the majority of these are women.

LCP DC Practice principal, Stephen Budge, stated: “Charging structures need to be simple and fair to ensure the ongoing success of auto-enrolment, but flat fees bite hardest on those who can least afford them.

“If a lower paid worker sees the value of their pension savings significant declining each year due to fees this can send a negative message about future pension saving.

“It is well known that managing millions of small deferred pension pots is a burden to the industry, but that is a reason to tackle the issue of small pots rather than carry on with an unfair charging structure on individual savers."

Indeed, recent research from the Pensions Policy Institute revealed that the number of deferred pots could grow from eight million to 27 million by 2035, whilst the Work and Pensions Committee recently wrote to pension providers to gather views on how to address this issue.

Considering this, LCP emphasised that the abolition of member borne flat fees should also be accompanied by new policies to ensure the consolidation of small pension pots.

The firm’s response was also “sceptical” of including transaction costs in the overall charge cap, arguing that these costs account for a "tiny faction" of the costs of running a pension, so capping them would make "little difference to overall costs".

It warned that transactions which are in the member’s interests, such as during the present crisis, could be hindered if an annual cap on costs had already been reached, adding that transaction costs cannot be known in advance as market movements can shift fees higher or lower.

Budge added: “The variability of these costs, which can only be calculated afterwards, could place restrictions on the ability of managers to trade which could seriously damage outcomes for members, especially in unusual market conditions of the sort we are currently experiencing.

“Many of the areas that the government is seeking to promote such as environmental, social and governance (ESG) investing and investing in illiquid assets tend to be associated with higher trading costs, and it is important that the DWP is joined up in its thinking on these issues”.

The firm's response also raised concerns that an across-the-board reduction in the current charge cap could be to the detriment of members, which could affect the drive for asset managers to be more actively involved in ESG issues.

It warned that a reduced charge cap would also reduce the potential for providers to offer value-added services to members, arguing that even at the current charge cap level, market pressures have seen a downward pressure on charges without the need for regulatory intervention.

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