Personal Pension  

The key questions on the proposed pension charge cap

A number of questions remain over the proposed auto-enrolment pension charges cap that has gained widespread support, particularly related to how any cap will be applied to the government-backed National Employment Savings Trust as its charges come under increasing scrutiny.

The government has proposed a cap of either 0.75 per cent or 1 per cent - or a comply or explain halfway house between the two - but has faced calls to lower this to 0.5 per cent from consumer group Which? and private sector providers such as L&G.

Whichever route it chooses to go down, questions remain over how the charges will apply to Nest, which was promoted as a ‘low-cost’ pension but which has a dual-pricing structure that does not sit easily within a simple AMC cap and which some have said is expensive.

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Nest’s pricing model comprises an annual management charge of 0.3 per cent and a 1.8 per cent charge from initial contributions, meaning its charges will initially appear high but will fall as a percentage as funds grow.

John Lawson, head of policy at Aviva, previously told FTAdviser that Nest costs 4 per cent on a one-year basis when the reduction in yield from the initial fee is factored in, falling to 1 per cent over five years and 0.67 per cent over 10 years.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said it would take 16 years for Nest’s charges to even out to below the 0.5 per cent threshold proposed by some.

Nest’s director of communications Graham Vidler has defended its charges, which he said have “been designed to deliver low charges in the context of a long-term saving product” and works out for many savers as broadly equivalent to 0.5 per cent AMC “over their saving lifetime.”

The question for the government, therefore, is how it applies charges to deal with a scheme such as Nest that includes charges not covered within its low annual management charge.

If it applies a simple AMC threshold then Nest would not be caught out on any calculation, but this would risk other schemes splitting charges to include an initial fee not covered by the cap.

If it includes all charges, then it must decide how it will work out the overall equivalent cost to apply the cap to. One would assume that Nest’s references to a ‘savings lifetime’ would be reflected, but what would this mean in practice - and would the reduction in yield cited by Mr Lawson be included?

According to consultancy Towers Watson, other questions that remain to be answered include:

• how providers will manage the re-pricing of tens of thousands of schemes while also taking on new employer business;

• how providers will equalise charges for active and deferred members if active member discounts are banned;

• how providers will reflect a commission-free future where commission has already been paid;

• whether charges in schemes whose charges will be below the cap rise because of providers having to set aside extra capital; and