‘Comply or explain’ needed for DGFs – Mercer

The ‘comply or explain’ option, combined with a 0.75 per cent base cap will lead to the best outcomes for members by allowing them to access products that provide greater certainty without stifling innovation says Mercer.

The consultancy’s response to the DWP’s charge consultation says other approaches mooted by the DWP, such as simply capping AMCs at 0.75 or 1 per cent, risk putting more innovative products out of reach of schemes.

Mercer has also called on a longer lead-in time for the implementation of a charge cap, arguing it makes little sense having to reprice thousands of schemes just as the number of organisations reaching the staging date starts to increase substantially.

Mercer leader, DC and savings business Brian Henderson says: “Certainty, in terms of reducing volatility, is crucial – people want to know what they are likely to retire on. Solely focusing on an AMC cap will potentially undermine schemes’ ability to provide some degree of certainty to members. DC schemes, for example, have, in recent years, used diversified growth funds (DGFs) to gain access to broader active asset allocation, alternative investments as well as active management and allocation. DGFs tend to be more expensive than low cost passive arrangements which do not incorporate these features but they do contribute to increased certainty.

“Placing a cap on charges might push products like these out of reach of schemes to the detriment of savers. In recent periods of market turmoil, DGFs have been successful in preserving members’ assets.  They are less volatile than equities. They may lag during bull markets but they are often much less affected by bear markets than equities. Longer term they should also improve the chances of avoiding poorer outcomes at retirement.  Sometimes, it is simply worth paying for this sort of quality. We are urging the DWP to retain some flexibility and focus on value for money, not just cost.”

“There should be full and complete disclosure of all charges to trustees, employers and governance committees,” said Mr Henderson. “We do question the logic of extending such detailed disclosure to scheme members in default funds, however. If members become focused solely on cost and sideline other factors like value for money, then it could lead to greater levels of opt-out.  As a compromise, the government might consider the provision of simple, visually creative and succinct information – similar to energy ratings on electrical appliances. This would give consumers a clear guide but ensure that costs are not the only factor that is taken into account when making a purchase.”