Pension funds should stop charging flat fees on small and dormant accounts, a report produced by the United Kingdom Work and Pensions Committee recommends.
The report said even if a pension fund makes a good return, a flat fee structure can completely wipe off its return.
"We are concerned that permitting a combination of a flat fee plus a percentage of funds under management charge has the potential to completely erode small dormant investment pots," the report said.
"We recommend that DWP review the level and scope of the charge cap, as well as permitted charging structures, in 2020. The review should consider preventing flat fee charging structures being applied to dormant pension pots and revisit measures to proactively consolidate smaller pots," it said.
It cited the example of a dormant pot of £300. If it returned 5% annually for 40 years, its value could be anything from £1720 to £0 depending on the fee charging structure.
UK funds currently follow an annual charge cap of 0.75% for DC schemes which are used for automatic enrolment from April 2015.
The charge cap covers all member-borne charges and deductions, but excludes transaction costs. There are three permitted charging structures under the charge cap:
A single percentage charge-capped at 0.75 per cent of funds under management annually
A combination of a percentage charge for new funds when they are contributed to the pot plus an annual percentage charge for funds under management
A combination of an annual flat fee plus an annual percentage of funds under management charge.
In Australia, some funds like AustralianSuper charge their admin fees as a flat fee.
In January, when the fund hiked its flat admin fee from $1.50 a week to $2.25 a week, Rainmaker analysis calculated how it would affect the smaller-balance members.
It found balances of $6000 will see total fees increase from 2.14% per annum to 2.61% per annum - or from $128.40 to $156.60 per year.
Members with $1000 in their account will have to pay $117 from $78. This was an increase from 8.64% to 12.36% per annum.