Personal Pension  

Call for pension charge cap reforms delay to 2018

The government should push back its reforms of auto-enrolment rules until 2018 to alleviate a squeeze on 30,000 medium-sized employers, which are due to be ‘staged in’ by the summer of 2014 but are facing uncertainty over the rules and an industry ‘capacity crunch’.

Today (20 November) The Pensions Regulator published recommendations to firms that they should have their pension scheme provider and advisers in place “at least” six months before their staging date to avoid falling foul of their legal obligations.

Statistics from the Department for Work and Pensions showed that 30,000 of medium-sized companies will be staged in by mid-2014. This will be followed by approximately 50,000 smaller and micro-sized companies before the full roll-out is completed in April 2017.

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Hargreaves Landown slammed The Pensions Regulator recommendation as unworkable, stating that proposed changes to the rules, including a proposed cap on charges for ‘qualifying’ schemes, additional quality standards covering governance and ban on ‘consultancy charges to pay for advice, are unlikely to be finalised before January.

Laith Khalaf, head of corporate research at the firm, said the regulator is effectively asking firms to make decisions on which provider to use before they know how the final rules will look, which opens them up to risk of fines.

Several experts, including Hargreaves Tom McPhail and Aviva’s John Lawson, have warned that a proposed cap on pension charges could expose the cost of government-backed National Employment Savings Trust, which use a two-tier model comprising of a low AMC and initial charge.

Taking into account the reduction in yield, Mr Lawson has said Nest could cost 4 per cent on a one-year basis and 1 per cent over five years. The government has proposed a cap of 0.75 per cent, 1 per cent or a ‘comply-or-explain’ option between the two.

In a video interview with FTAdviser, Sue Beaumont, pensions consultant at Linder Myers Solicitors, warned last week that employers could face fines of up to £5,000 a day for compliance breaches relating to their chosen scheme. She added that as many as 80 per cent of schemes are non-compliant.

Employers that do not move to finalise providers and advisers early also face the spectre of a “capacity crunch” as providers struggle to cope with a rush of business as large blocks of smaller business approach their staging dates.

Jamie Clark, business development manager at Scottish Life, even warned some providers may choose to shut their doors to new business before the bulk of smaller companies are staged in, stating that his own firm may “leave the market post-2015 if we are at capacity”.

Mr Khalaf said that the combination of short-term uncertainty requiring firms to act quickly and uncertainty over reforms should make the government think twice and push back the changes until 2018 when all employers are staged and businesses will have a chance to “come up for air”.

He said: “These are all proposed changes with varying chances of being adopted, however they all may impact on whether an employer can use their current scheme for auto-enrolment, or even whether they will be accepted by a new pension provider.