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Law360, London (August 18, 2020, 1:14 PM BST ) Retirement savers could find their cash is trapped in low-return funds if pension regulations do not allow flexibility as Britain moves out of the COVID-19 crisis, a consultancy company has warned.
LCP, formerly Lane Clark & Peacock LLP, said on Monday that some savers who have chosen to invest their retirement pots in higher-return investments will have had those contributions diverted during the COVID-19 outbreak by pension funds, which want to close off and protect assets that are harder to value, such as property property, amid a crisis.
But the so-called charge cap in pension regulations, which dictates that default pensions cannot be charged more than 0.75% per year, means that some of those savers may be unable to re-route their pensions back to their chosen higher-return investments once the COVID-19 restrictions are lifted, the consultancy said.
"Where members have actively chosen to invest in property, they have been willing to face higher charges in the hope of securing better returns," Laura Myers, partner at LCP, said. "It would be perverse if this was now regarded as a default arrangement and further, in breach of the charge cap."
Myers said it would be "even more perverse" if this meant that members who actively want their contributions to flow into higher-return funds stay in more cautious investments and end up with smaller pension pots.
LCP called on The Pensions Regulator to provide clarity on how the charge caps rules will be interpreted when it comes to investing after COVID-19.
The existing charge cap mandates that any members who are covered by the automatic enrollment rules are protected from any charges over 0.75%. The charge applies to the default fund under the legislation, which is the fund that contributions will be diverted to if the member does not make an active choice.
Higher-return funds have been gated, or closed off, during the economic volatility caused by the COVID-19 outbreak. This means that more cautious investments may have become the default fund for savers who would have chosen to invest in portfolios such as property if they were not restricted because of the crisis.
The government should make sure that the pensions regulations do not prohibit those savers from moving their money back into higher-return portfolios once the restrictions are lifted, LCP said.
The charge cap is under review by the government.
The Department for Work and Pensions said in June that pension industry groups and bodies have until August to contribute to the consultation on the cap. They are also being asked whether they believe that providers are presenting information on fees to savers in a transparent way.
The government's consultation paper said that lowering the cap was a possibility. The cap was reviewed in 2017, with a promise that it would be reviewed again in 2020. The government estimates the rules have so far helped more than 10 million savers.
--Additional reporting by Martin Croucher. Editing by Ed Harris.
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