Several industry heavyweights including outgoing Association of British Insurers director general Otto Thoreson and Graham Vidler of the National Association of Pension Funds have issued fresh warnings on the potentially pernicious effects of the charge cap for occupational pensions.
Speaking in Parliament yesterday evening (1 December) during a committee meeting on progress in various reforms including auto-enrolment, Mr Thoresen said that the ABI position was clear that the 0.75 per cent charge cap “would have unintended consequences in terms of innovation in the market”.
Mr Thoreson also sounded alarm over suggestions the cap could be lowered further in future, saying it was essential providers sought to continue innovating to produce “better technology” and that the further the cap is pushed down the higher the risk some providers will step away.
As FTAdviser reported in the summer, consultancy Deloitte had previously suggested providers may withdraw from the workplace pension market if the cost of provision is greater than the defined contribution charge cap and additional charges cannot be levied outside it.
The warning came after Royal London became the latest firm to reveal a hit to expected revenues, as its chief executive put the cost to the industry over a 10-year period at £1bn, five times the government estimates.
In the wake of the cap, firms such as Standard Life revealed they would require pension scheme members from smaller firms to pay additional member costs to make up the shortfall on existing charges which were set higher than the cap.
Responding to a question from Anne Marie Morris, Conservative MP for Newton Abbot, Mr Thoreson said that because the 75 basis point charge cap is the limit on charges, if there are other services delivered some providers may charge them separate fees.
Graham Vidler, director of external affairs at the National Association of Pension Funds, said that having a charge cap at 0.75 per cent “doesn’t bite” at many Napf members. He said the average charge runs at around 0.35 per cent and only 25 per cent of members charge over 0.5 per cent.
However, he did agree with Mr Thoresen’s comments on innovation, saying that a cap poses a challenge to “innovation and entry across the market”.
Mr Vidler added: “Schemes that charge 0.75 per cent or more are having to reassess their investment strategy and incurring transaction costs which may not make the move best for members.”
Jonathan Lipkin, director of public policy at the Investment Management Association, also agreed with both the suggestion that the cap could stifle innovation.
Mr Lipkin added that investment managers and pension providers must do more more to explain value for money, saying the industry needed to have a quality debate that accompanies the cost debate.
The comments come in the wake of suggestions from the Labour party that in the wake of new pension freedoms, it could introduce a price cap mechanism in the at-retirement market to mirror that in auto-enrolment, to protect mainstream consumers going into drawdown.
ruth.gillbe@ft.com