A cap on charges in qualifying auto-enrolment pension schemes will not leave government-backed default provider National Employment Savings Trust out in the cold, despite the government rejecting an exemption for the initial charges it levies on member contributions.
The Department for Work and Pensions revealed today (27 March) that workplace pensions will be subject to a management charging cap of 0.75 per cent from April 2015.
The government had initially proposed capping charges at either 0.75 per cent or 1 per cent - or applying a comply or explain middle ground between the two - to be introduced from April of this year.
In January the move was delayed for “at least a year” to April 2015 while it reviewed what would be included in the cap amid fierce lobbying across the industry.
Particular concern had focused on Nest, which charges an annual management charge of as little as 0.3 per cent but also levies an initial ‘contribution charge’ of 1.8 per cent that many believed would see if fall foul of any maximum threshold.
In November 2013, pensions minister Steve Webb hinted that any cap may not include initial charges, saying Nest was “not the only scheme with a contribution charge” and that such a structure “does help to ensure new entrants to the market”.
In the event contribution charges have not been excluded, with the consultation response stating that the 0.75 per cent limit will apply apply to funds under management and to all management charges. Trading costs are, however, not counted towards the cap.
Despite this, the DWP has produced a table on effective overall charges where initial fees are applied that places Nest well within the 0.75 per cent limit at less than 0.5 per cent (see table).
|Equivalent proportion of pension list through a contribution and AMC structure (%)|
|Annual management charge|
Source: DWP. Modelling assumptions: salary £20,000; contribution rate 8%; investment growth 7%; earnings growth 4%; inflation 2%.
Aviva’s John Lawson previously said that when reduction in yield was factored in Nest could cost 4 per cent on a one-year basis and 1 per cent over five years. He had said he expected the cap to be a total expense ratio including custody and legal costs, but not trading expenses.
Mr Lawson previously said: “Nest is very expensive: you would need to be in it for 18 years and three months, any less is poor value for money.
“It costs 0.67 per cent if you are in it for less than 10 years and less than five years in Nest will cost 1 per cent. One year in Nest means you are paying 4 per cent in charges... with dual pricing, you have to calculate the reduction in yield.”
In response to the government announcement, Tim Jones, Nest chief executive, said: “In terms of charges, the government has now confirmed its benchmark for good value by setting a cap on how much schemes can charge.
“These arrangements will provide welcome clarity for consumers and employers on what good value means, and in helping them to compare schemes.