Pensions minister Steve Webb has responded to questions surrounding the charges levied by the government’s default auto-enrolment scheme by hinting that a looming charge cap on qualifying pensions would not include initial charges.
The government is currently consulting on a range of pension reforms, including a charge cap of 0.75 per cent, 1 per cent or a ‘comply or explain’ compromise between the two, where if a scheme wants to set a higher charging cap they will need to explain the reasons why.
Whatever the level, a number of pension experts have called for clarification on how the cap will apply to the National Employment Savings Trust, which Aviva’s John Lawson said costs more than 1 per cent until an individual has been saving for more than five years.
Nest charges as little as 0.3 per cent as an annual management charge, but levies a 1.8 per cent initial charge, which means costs are higher at the outset and drop as the fund grows.
Responding to a question on whether a cap could see Nest banned during a live Q&A with FTAdviser sister title the Financial Times yesterday (26 November), Mr Webb defended the contribution charge as being helpful to encourage “new entrants to the market”.
He said: “Clearly with a contribution charge and a low AMC, people will do better the longer they stay in a scheme. Of course, NEST isn’t the only scheme with a contribution charge, and this charge structure does help to ensure new entrants to the market which is something we all want to see.”
Hinting that initial ‘contribution charges’ were not part of government thinking surrounding a cap, Mr Weeb continued: “And of course at the age of 55 you could easily be working for another 10-15 years which would mean the importance of the contribution charge would diminish considerably.”
The minister also revealed that the government is open to alternative options for its cap, responding to recent calls from consumer groups and providers for a lower cap of 0.5 per cent.
Mr Webb said: “Clearly if we had an overwhelming response for something different, we would look at that, though I’d need to talk to the lawyers before announcing something that wasn’t in the original consultation document, and there aren’t any in the room with me at the moment.”
According to a poll taken during the session, most people believe the defined contribution charging cap should be at 0.75 per cent, with 27 per cent each believing 1 per cent and 0.5 per cent would be best.
Graham Vidler, director of communications at Nest, previously told FTAdviser: “The Nest charge has been designed to deliver low charges in the context of a long-term saving product. For many types of Nest saver, our charges work out as broadly equivalent to 0.5 per cent AMC over their saving lifetime – a good ‘benchmark’ for low charges currently enjoyed by members of large workplace schemes.
“Most savers will experience a slightly lower rate, particularly if they have contribution breaks, which is ‘typical’ saving behaviour; some savers, if they are enrolled later in life, may experience a higher rate.”
