Five adviser concerns on an auto-enrolment charge cap

Despite auto-enrolment being brought in a year ago, the government is still tinkering with the rules. Its latest move is to propose a cap on auto-enrolment pension charges.

But advisers have highlighted several concerns around what could happen if the government goes ahead with its plans.

1. Limited investment choice

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Too low a cap will limit the fund choice available and therefore investment outcome, according to Ruth Whitehead of Ruth Whitehead Associates.

“The government talks about pension ‘savers’, but your pension contributions aren’t savings, they’re invested,” she says. “It stands to reason that you should have your pension invested in the best and finest funds available. In order to do that, you should have as wide as possible range of fund options from externally-managed investment houses such as Invesco Perpetual or M&G.”

2. What happens when you move out of an auto-enrolment scheme?

The government must make clear whether auto-enrolment funds must remain segregated if they are eventually transferred to another pension arrangement, says Andrew Swallow, chartered financial planner at Swallow Financial Planning.

“How does the government propose to police the new rules?” he says. “If an individual is in a Nest scheme for five years and then moves to self-employment and transfers his auto-enrolment funds into a Sipp, will he not be able to use the auto-enrolment funds for Sipp investments?”

3. Poor value for money and a repeat of stakeholder

Capping costs and restricted fund choices could lead to substandard default ranges, Ms Whitehead says, as happened in stakeholder pensions.

“The key point here is that charges are only part of a larger and more complex picture,” she says. “Pensions must be competitively costed, but the cheapest option is rarely the best value for money. Stakeholder pension charges were capped, and the resulting products offered a small and mostly mediocre set of funds in which to invest, to the extent that I as an adviser felt unable to recommend them as good value.”

4. Too much focus on negativity for pension saving

Talking about charges concentrates the mind in the wrong direction, says Simon Webster, managing director of Fact and Figures Chartered Financial Planners.

“The government wants to encourage saving so all this talk about charges is self-defeating,” he says. “It focuses the mind of consumers on more perceived pension negatives instead of the huge tax incentives to save.”

5. A cap could force smaller employers into Nest

Existing charging terms for large employers are relatively attractive, says Tom Dean, chartered financial planner at Plutus Wealth Management, but this will not necessarily filter down to smaller employers.

“Most of the schemes that will have been set up already will have been able to do so on attractive terms, ie the employer will receive competitive rates because even after a low AMC, there is something in it for the pension company,” he says.

“The smaller employers with enrolment dates still to come may not find it so easy to get competitive charges and so you think these firms might benefit from the cap, except if the pension company does not think it is viable business (and they are not charities), they will not offer a scheme to the company anyway. This means that the employer will be forced into Nest or one of the other low-cost providers.”