A call has been made for an end to monthly flat fees charged on defined contribution pensions arguing they can be “detrimental” to low-paid workers and could erode whole pots.

In its response to the Department for Work and Pensions’ consultation on the automatic enrolment charge cap, consultancy firm LCP said fixed fees can “steadily erode” small pension pots, especially those left behind when people change jobs, and in extreme cases can reduce the pot to zero.

LCP said this was both “unfair and creates reputational risk for the industry” and has called for the phased abolition of flat fees while the government comes up with new policies for small pot consolidation.

Stephen Budge, principal in the DC practice at LCP, said: “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.”

The government has previously argued flat fees could be beneficial for savers with bigger pension pots, which is why it is not considering a ban at this stage.

However, it did admit the structure in its present form does not provide adequate protection for small pots. Instead, to prevent small pots from being eroded to zero, the government is considering measures which will set a minimum pension pot size before a flat fee can be charged.

The consultation asked the industry if the current 0.75 per cent cap for DC default funds should be lowered or if transaction charges should be included under the cap.

LCP said it is “sceptical” of including transaction costs, noting in most cases these were very small and, in many cases, negative.

It is also concerned an across-the-board reduction of the charge cap could be to the “detriment of members” and could reduce the potential for providers to offer value-added services to members.