The proposed charging cap for auto-enrolment schemes of 75 basis points is too high, the majority of industry commentators have argued.
Pensions minister Steve Webb announced in the House of Commons yesterday (29 October) that a consultation will launch today (30 October) to seek views from the industry on what the cap should be, but that it will likely settle on 75bps.
Both Adrian Boulding, Legal & General’s pensions strategy director, and Will Aitken, a senior consultant at Towers Watson, agreed that the proposed 75bps cap is too high.
Mr Boulding said to ensure value for money for consumers, nobody should have to pay more than 0.5 per cent, adding this is the “benchmark for value”.
He said that large schemes have already demonstrated that this is “perfectly achievable”.
Legal & General believe that 0.5 per cent is where government should pitch the price cap, and that it should apply to the default fund into which employees are automatically enrolled.
He said: “There are plenty of additional services that some people will find worth paying more for. Wider investment choice, financial advice, auto-escalation programmes are all things that members could choose to pay more for. But the basic pension that everybody is defaulted into by their employer should cost no more than 0.5 per cent.”
Steve Webb, the Pensions Minister, told the House of Commons this afternoon that the Government will consult on a 0.75 per cent cap on defined contribution pension charges. A consultation document will be published tomorrow.
Mr Aitken added that 0.75 per cent “is still above the odds for a basic product”, warning that a charging cap only looks at what people are paying and not what they are getting for their money.
He said: “At the same time, the lower the charge cap is set, the more the government risks ensuring that only basic products could fit underneath it. If investing in a broader range of asset classes is expected to improve outcomes at retirement, regulations should not prevent trustees from designing default funds that do this.
“So it is better to complement a charge cap with measures focused on the causes of unnecessarily high charges than to set the charge cap as low as possible.
“However, there will be a lot of devil in the detail. For example, not all charges are a simple percentage of account value. Converting contribution levies or flat-rate administration fees into a charge that can be compared with the 0.75 per cent cap will require some assumptions about how long the member is in the scheme for.”
Peter McDonald, pensions partner at PricewaterhouseCoopers, added that 0.75bps should be the maximum amount charged and should not be considered the default option.
He said: “Many schemes, particularly master trusts and those for larger employers, should be able to charge less due to economies of scale. Competition should also help drive down charges.
“It is important to remember that member value is not just about the charge, but also what the member gets for that. Good investment management, member communication and education are just as important to ensure people are getting the most value from their pensions.
“Capping pension charges introduces a completely new dynamic to pensions in the UK. Governments and regulators now have the ability to name and shame pension schemes that charge too much, meaning employers’ own brands could be on the line if the pension scheme they offer their employees is not up to scratch.”
Steven Cameron, Aegon’s regulatory strategy director, said that while low charges have obvious surface appeal, “they can also produce adverse consequences for customers - poorer quality of services, less choice and loss of investment in innovation and development”.
He said: “Next year, smaller employers will start auto-enrolling their employees. They don’t benefit from the same economies of scale as the largest employers who have already auto-enrolled. To protect our existing customers, private pension providers can’t take on new schemes at a loss.
“Therefore, introducing too low a cap will mean many employers will be forced into using Nest. Surely a competitive and innovative private market alongside Nest is in the best interests for savers.”
