“The government’s decision to delay the introduction of a cap on workplace pension charges was largely welcomed by an industry fearful of a well-intended but ultimately damaging rush-job.”
Lots of legacy DC schemes aren’t good value for members. The problem is the cure prescribed in the consultation could be a bit of a blunt instrument and might have some unintended consequences.
Debbie Falvey
The proposals, described by pensions minister Steve Webb as a “full-frontal assault” on high pension charges when announcing the plans in October last year, were expected to be introduced next month (April), but following the consultation late last year, the department for work and pensions (DWP) has pushed any implementation back by at least a year, arguing that the “ important and complex” matter deserved greater consideration. The rethink has left many with the distinct impression that the arguments put forward by the industry against pushing through the proposals took the DWP by surprise, forcing them to pause for thought. “The government was probably a bit surprised at what I perceive to be the strength of protestations and arguably some of the quite sensible comments about just how much they were expecting us to package up in these prices,” says Russell Investments director Crispin Lace. “You simply can’t have a business if you make [the cap] too low and I think the government realised there was actually quite a good argument there.” The delay is no doubt a disappointment for Webb, who found himself under pressure to act swiftly following a damning report on the defined contribution and annuity markets by the Office of Fair Trading along with media campaigns from the Daily Mail, Which? and others.
In response, Webb proposed three alternative models to reduce auto-enrolment charges to less than 1%. These included: • Limiting charges to 1% of funds under management, extending the current stakeholder plan charge cap to all schemes used for AE • Restricting charges to no more than 0.75% of assets – a move that reflects the charging levels already being achieved by many schemes • Implementing a two-tier ‘comply or explain’ option, which would apply a charge limit of 0.75% as standard. However a higher cap of 1% would be available to employers who provided reasons for the higher costs to The Pensions Regulator. Introducing such controversial measures in such a short space of time was never going to be easy, however.
Insurers lobbied hard against the cap, arguing that while many older plans did indeed offer poor value in return for the high fees they charged, schemes opened since 2001 already have an average charge of around 0.5%. Others meanwhile warned that April, the original date for the cap, is the height of auto- enrolment implementation for many companies and therefore not an ideal time for extra rules to be forced upon their pension arrangements. “Pushing a cap through for this April would have been a mad rush and could well have derailed the auto-enrolment programme,” said Hargreaves Lansdown pensions analyst Laith Khalaf. “Waiting a year will give valuable breathing space to employers so they can get auto-enrolment up and running, while ensuing scheme members can be confident they are getting a fair deal. The government now urgently needs to address long-running failings in the retirement income market.” In a further blow for Webb and the DWP, the Regulatory Policy Committee agreed with the industry’s objections, finding that the consultation had not properly assessed the impact a cap would have. In addition to a clash with the latest round of auto-enrolment implementation, precisely how much of an impact a cap on charges would have – and whether one is needed at all – remains up for debate. As Aon Hewitt DC consultant Debbie Falvey points out: “Lots of legacy DC schemes aren’t good value for members in terms of what they provide for the cost. The problem is the cure prescribed in the consultation could be a bit of blunt instrument and might have some unintended consequences. “If you’re not careful what you’ll do is undermine the efforts people have made or make people unpick work when actually what they’ve been trying to do is focus on trying to deliver good member outcomes. They might have ended up with a charge slightly above the cap in the process, but now they’ll have to refocus their efforts around this new cap and actually undermine all the good work they’ve done.” The belief that the proposals are too much of a blunt instrument is one echoed by Russell’s Lace, who believes a more targetted approach is needed.
“Fees and the services you receive in return obviously varies wildly from one type of scheme to another, so in terms of caps for auto-enrolment schemes I think you should say ‘we’re introducing a cap of x for communication and y for websites and development’ for example, rather than beating up investment managers for making a fortune.” While the DWP retreats to mull over its proposals and the resulting industry arguments against, the plans for a cap add fuel to the debate over the future of DC provision and how much people should pay for it. As BNY Mellon head of DC UK, Catherine Doyle points out, cost should not be regarded as the be-all and end-all: “While charges can significantly impact the outcome for pension savings, the onus really should be on ensuring the scheme delivers value for money rather than focussing solely on cost.”
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