Government estimates of the potential effects of introducing a cap on pension charges for schemes under auto-enrolment rules are “not fit for purpose”, the Regulatory Policy Committee has declared.
According to the committee the proposals do not adequately demonstrate why a cap on charges would have “a zero net impact on the pensions industry”, as was claimed in the government consultation.
Giving the Department of Work and Pensions’ assessment a “red” rating, the committee also rebuked the government for failing to wait for its impact assessment before issuing the consultation, in a break from common procedure.
Perhaps of greater concern is the argument made by the committee which predicts that many pension providers could raise their charges to cap-level, which would be either 1 per cent or 0.75 per cent based on the draft proposals.
This would be an issue particularly if the government were to limit the cap only to annual management charges in an effort to exclude it’s own National Employment Savings Trust, which has a 0.3 per cent AMC but a 1.8 per cent initial charge that means overall fees do not drop below 1 per cent until a saver has been a member for five years.
Steve Webb, pensions minister, previously hinted during a live Q&A with the Financial Times that the cap would only apply to annual charges, but there is concern that this might open the door for others to introduce contribution charges to bump up margins.
The report states: “Given that the majority of pension charges are currently at or below 1 per cent, a possible effect of a charge cap would be that providers charging less than this cap would tend to increase their charges to the level of the cap without losing customers.
“The likelihood and impact of this outcome should be explored in more detail.”
The committee also warned that the Department of Work and Pensions seriously underestimated the cost of an alternative option which would improve disclosure of pension charges instead of capping them.
In its proposals the DWP estimated increasing disclosure would cost £172m while capping charges would only cost £19m.
The committee responded that evidence in the proposals themselves suggest “that the [impact assessment]’s estimates are significantly overstated” for the increased disclosure option.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The DWP conducted this consultation in a tearing hurry, in fact they rushed it through so quickly that they failed to conduct their Regulatory Impact Assessment properly.
“This means that the entire consultation process is now in doubt and will probably have to be rerun. If the impact assessment figures were wrong then everyone involved in the consultation including employers, pension providers and the DWP’s own officials will have to reconsider their conclusions from the consultation.
“This will almost certainly mean a delay in the introduction of any charge cap on pensions, if one is introduced at all.”