Auto-enrolment. Workplace pension charges cap delayed
The Pensions Minister has confirmed that a proposed cap on annual management charges levied by workplace pension schemes used for auto enrolment will not be introduced before April 2015.
In a statement to Parliament, Steve Webb said that the government remained "committed to tackling high charges in workplace pension schemes" but that responses to its recent consultation on the changes had indicated that the cap was being introduced too quickly.
“We remain strongly minded to cap pension scheme charges in the default funds used for automatic enrolment," Webb said in his statement. "However, we have consistently encouraged firms to start getting ready for automatic enrolment 12 months ahead of the time the new employer duties apply to them. Therefore, to give those employers at least 12 months notice of the rules that will apply to them; I can confirm that any cap on charges will not be introduced before April 2015."
This statement follows the government’s proposals, announced in a consultation paper in October, setting out three possibilities for a charge cap:
- Cap of 0.75%
- Cap of 1%
- A two tier ‘comply or explain’ option with a standard cap of 0.75% and a higher cap of 1% available to employers who report to The Pension Regulator why their scheme charges exceeded 0.75%.
We agree with the government that too many company pension schemes charge too much and provide poor value to employees, and steps need to be taken to address this.
However, we have concerns that if a charge cap is set too low, while this would reduce costs for employees, it could have other unintended consequences for both employers and employees. There are already severe capacity concerns meaning that many employers will struggle to access the right pension provider for them. A charge cap would mean that providers have to put aside additional capital reserves. This could lead to some providers deciding to pull out of the market, increasing capacity problems still further, or provide a reduced level of service to employers.
Product providers are already being very selective about the employers’ pension schemes they will accept. Being forced to offer lower charges means they would turn down even more schemes, simply because those schemes wouldn’t be profitable business for them to take on. Smaller employers would feel the brunt of this.
We have even seen calls for a charge cap lower than 0.75% in some quarters, notably from Legal & General. It is important to note than Legal & General currently only accepts new business which is profitable for them at a 0.5% charge. This means that they only offer auto enrolment schemes to companies which they consider to be high quality and profitable at that level, all other employers are turned away. If a charge cap of 0.5% was adopted then other providers would have to take the same stance meaning that many smaller employers or those with older or less well paid workforces would have no provider choice at all.
It does seem that a charge cap at some point is inevitable. In order to ensure that employers and employees aren’t faced with less choice, inferior products and a lack of ongoing service, we would support that cap at 1%, although would expect many schemes to charge significantly less than this.