Personal PensionJul 31 2014

Transaction costs in charge cap ‘would be a disaster’

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

A number of providers have expressed concern over the possible introduction by the government of transaction costs within the pension scheme charge cap, warning it would have a negative impact on the services provided to members.

In March this year, the Department for Work and Pensions confirmed new measures that would incorporate a 0.75 per cent charge cap on charges from April 2015, to ensure pension schemes deliver value for money for savers.

Jackie Wells, head of policy at the National Association of Pension Funds, expressed concern that other costs, such as transaction costs, might be included when the cap is reviewing in 2017, which she said could have unintended consequences for savers.

“Of course, we have the charge cap for next April - is this government saying we will have to fit other things into it so transaction costs might have to be squeezed into it?

“So that squeezes out some of the really important things you have to do for your members like communication and investment management.”

Ms Wells also fears that schemes will “end up re-designing in a way which does not necessarily meet all the changes that are going through at the moment”. As a result, the Napf have called for a delay on the implementation of the charge cap.

Ms Wells added: “The timetable for implementation is quite tight, particularly with all the uncertainty of the Budget laid over that.

“Actually redesigning your scheme in an environment where you don’t know all the answers of what you are going to have to do for next April, and getting that right for numbers and not incurring costs that are excessive or wasted at a time when you have a charge cap coming in, is quite a difficult combination.”

A number of providers have also expressed concerns over how any broadening of the scope of the cap - which pensions minister Steve Webb has previously hinted could be lowered from 0.75 per cent - would impact scheme members were it to take place.

John Lawson, Aviva head of policy, warned that “including transaction costs within the cap could end in disaster”.

Mr Lawson added that it is fine for larger and medium sized firms to fit all the current costs into the charging cap but warned it “might be more of a challenge” for smaller firms to include transaction costs.

Laith Khalaf, senior analyst at Hargreaves Lansdown, warned that if transaction costs were included then it was likely the current cap would need to be moved up. He added that it would be difficult to include transaction charges as they are “variable” and can change from year to year or even month to month.

Steven Cameron, regulatory strategy director at Aegon said: “We do not believe transaction costs should be included in the charge cap. They are necessary costs of investing in markets. Fund managers should transact to maximise performance in line with the fund’s objectives.

“Capping them could easily harm performance. We support the level of transaction costs being disclosed to those making decisions about schemes – employers, advisers and in future independent governance committees.”

Standard Life was also concerned about the impact of them on default funds were they to be included in the cap. “We believe it that it would be detrimental to members to include transaction costs (a variable cost, in part dependent upon the volatility of markets) within the charge cap for default funds.”

The spokesperson added: “It would be of concern if certain features started to be diluted as a result of the charge cap.”