Following a variety of initiatives by regulators that have had varying degrees of success, the government has taken strong action over occupational pension charges and announced a cap that will come into force in April 2015.
The government issued a consultation paper at the end of October 2013 about charges in workplace pension schemes used for automatic enrolment, with a view to imposing a cap in April of 2014.
The paper suggested either a cap of 1 per cent, a cap of 0.75 per cent or a two-tier ‘comply or explain’ scenario with a standard charge cap of 0.75 per cent.
This plan was seemingly kicked into the long grass later after it was pushed back by “at least a year” in January, in the wake of staunch criticism from the industry and the influential Regulatory Policy Committee.
In particular, the government was said to need the extra time to decide what would fall under the cap, amid debates over initial contributions and trading charges.
In the event, a final decision was announced in March stating that a charge cap at the lowest level of 0.75 per cent would be imposed from April 2015, to include all administration charges including those for initial contributions, but not trading costs.
Particular concern had focused on Nest, which charges an annual management charge of as little as 0.3 per cent but also levies an initial ‘contribution charge’ of 1.8 per cent that many believed would see if fall foul of any maximum threshold.
The DWP produced a table on effective overall charges where initial fees are applied and how they sit against the cap. It places Nest well within the 0.75 per cent limit at less than 0.5 per cent (see table).
| Equivalent proportion of pension list through a contribution and AMC structure (%) | |||||||
| Annual management charge | |||||||
| Cont charge | 0.1% | 0.2% | 0.3% | 0.4% | 0.5% | 0.6% | 0.7% |
| 0.5% | 0.16 | 0.26 | 0.36 | 0.45 | 0.55 | 0.66 | 0.76 |
| 1% | 0.21 | 0.31 | 0.41 | 0.51 | 0.61 | 0.71 | 0.81 |
| 1.5% | 0.26 | 0.36 | 0.46 | 0.56 | 0.66 | 0.77 | 0.87 |
| 2% | 0.32 | 0.42 | 0.52 | 0.62 | 0.72 | 0.82 | 0.92 |
| 2.5% | 0.37 | 0.48 | 0.58 | 0.68 | 0.78 | 0.88 | 0.98 |
Source:DWP. Modelling assumptions: salary £20,000; contribution rate 8%; investment growth 7%; earnings growth 4%; inflation 2%.
There have been suggestions that the cap could be merely an initial move and that the ceiling it applies could be lowered further in the coming years.
A cap could cause a pensions capacity crunch, Mr McPhail warns, squeezing supply just as demand is rapidly rising due to employers hitting their staging dates.
Such concerns have already been fueled following comments from several providers that they may be forced to stop taking on new business when the glut of smaller and medium sized businesses are staged in over the next three years,
In terms of the effects of the changes, Standard Life has, for example, said it would introduce a £100 monthly member charge for smaller employers with modest contributions.
The charge will apply to employers that previously agreed charges above the new cap with fewer than 50 employees and less than £150pm in average contributions. Other providers could introduce similar measures to make up for any perceived losses.
