RegulationOct 30 2013

Gov’t eyes commission ban and unveils AE fee cap options

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Workplace pensions could face capped charges as well as a ban on consultancy charging and commission arrangements set up pre-Retail Distribution Review if the government goes ahead with proposals published today.

The government has proposed a charge cap of 1 per cent of funds under management, reflecting the current stakeholder pension cap; a lower charge cap of 0.75 per cent of FUM, reflecting the charging levels for many schemes and a two-tier ‘comply or explain’ cap.

In a consultation paper on scheme charges, published today (30 October), the government said the third option, a two-tier comply or explain cap means there would be a standard cap of 0.75 per cent of FUM for all default funds in DC qualifying schemes.

A higher cap of 1 per cent would be available to all employers who explained to The Pensions Regulator the reason for higher charges.

The Department for Work and Pensions said the reason for introducing a cap is there is “evidence to suggest” that information alone may not act to correct the incentive problems that exist in the market and some employers will struggle to act on any information they receive.

According to the DWP, the cap should be introduced for all members, both active and deferred, of default funds in qualifying defined contribution schemes for those employers staging from April 2014. The cap would then be extended to capture all employers who have staged from October 2012 up to and including March 2014 by April 2015.

The DWP also wants to hear industry views on whether differential charging between active and deferred members should be banned in DC qualifying schemes.

In its paper the DWP said this would address active member discounts and prevent a similar practice whereby scheme members are moved to an individual personal pension with higher charges when they leave employment and stop making contributions.

This ban could take effect for schemes put in place for employers staging from April 2014. The government wants to hear views on transitional arrangements for dealing with schemes in place prior to this date.

The consultation also proposes extending the consultancy charging ban from auto-enrolment schemes to all qualifying DC schemes.

Since September 2013, the use of consultancy charges in automatic enrolment schemes has been banned following a review which found they posed a significant risk of scheme member detriment.

The DWP has further proposed that adviser commissions set up prior to the introduction of the Retail Distribution Review should be banned in qualifying schemes, following concerns that schemes containing built-in adviser commissions may continue to be used for current members, as well as being used for people automatically enrolled in the coming years.

Steve Webb, pensions minister, said: “The government believes that enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges. We are consulting on a cap on pension charges. A range of options will be on the table including an outright ban on all charges above 0.75 per cent per year.

“I’m confident that we will make the system fairer for anyone being automatically enrolled into a workplace pension and will finally address the issue of charges which has been neglected for far too long.

“Alongside the pension cap, the government also wants to increase transparency in the sector. The consultation will help the government to determine whether further transparency measures, alongside those detailed in the consultation, are necessary or desirable.”

The consultation closes on 28 November 2014.