It has long been anticipated by the industry: the government has announced a consultation on capping charges in auto-enrolment pensions.
Some might argue it’s a long time coming; others might argue that, likewise with other post-implementation auto-enrolment tinkering, all of this should have been sorted before employees started being enrolled.
Either way, a cap has been proposed and likely a cap will come. But will it meet the needs of the rafts of individuals being enrolled?
Defining what is included in the cap is critical. A 0.75 per cent cap for total costs would represent a pretty good deal, but if certain costs are excluded from this cap, it’s like waving a red rag at a bull for the pensions industry – providers will inevitably find other places to hide costs. And to those providers that label this thought as ridiculous, you need only look at the difference between annual management charges and total expense ratios/total cost of ownership to see how headline figures aren’t representative.
Pensions minister Steve Webb has said any proposed cap must be “tougher” than those previously implemented on stakeholder pensions, with the 1 per cent cap for those now looking rather high. The devil is in the detail, but the huge variety of charging structures that have been dreamt up by the industry over the years makes it more difficult to catch everything.
But the main question in my head – and that of many others – is does a cap tempt cheaper providers to raise their prices? For those who have gone all guns blazing into the auto-enrolment market, raising headline figures would be very damaging. For those who aren’t that fussy whether they get auto-enrolment business or not, however, shuffling prices upwards towards a maximum-allowed amount must seem like a sensible idea.
Providers are already cherry-picking auto-enrolment business. Once the oft-predicted capacity crunch hits, a few basis points here or there won’t make much difference to employers; what will make the difference is whether they can get accepted by someone in time so they are not fined for non-compliance.
