Mercer has backed a comply or explain approach to annual management charges, warning that fee caps risk putting more innovative products out of reach.
Responding to the Department for Work and Pensions consultation on capping, Mercer said 'comply or explain' offered greater flexibility and meant schemes could access products that increase certainty and improve outcomes for members.
Reducing volatility was 'crucial' because people want to know what income they are likely to be able to retire on, said Brian Henderson, Mercer's leader for defined contribution and savings.
'Solely focusing on an [annual management charge] cap will potentially undermine schemes' ability to provide some degree of certainty to members,' he said.
He cited diversified growth funds (DGFs), which have been used to gain access to broader active asset allocation, alternative investments as well as active management and allocation. These funds tend to be more expensive than passive arrangements, but do contribute to increased certainty, Henderson said.
He went on: '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.'
The DWP also consulted on whether the disclosure of charges was a positive step for the industry. Henderson said 'there should be full and complete disclosure of all charges to trustees, employers and governance committees'. But he added that Mercer questioned the logic of extending such detailed disclosure to scheme members in default funds.
'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,' he warned.
As a compromise, the government could 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,' said Henderson.
Mercer also raised concerns over the timings proposed in the DWP consultation. According to the DWP, the cap would first be imposed on employers staging from April 2014 and be extended to cover all pension schemes by April 2015.
'The DC market is already stretched to capacity dealing with auto-enrolment and with legacy schemes following the Office for Fair Trading review,' Henderson said.
'If providers are asked to re-price thousands of DC plans, there is a risk that auto-enrolment will not be properly implemented and existing arrangements will be put at risk.' As such, Mercer said it would favour a longer and more phased transitional period.
