Pensions minister Steve Webb announced today that from April 2015 a price cap for workplace pensions will be set at 0.75 per cent covering annual management and all other management charges.
Royal London branded the announcement “lacklustre”, stating that on the one hand the chancellor delivered radical pension changes in last week’s Budget but on the other “we are back to the same old price-capping policy options”.
Phil Loney, group chief executive of Royal London, said: “A price cap will do very little to improve competition in the workplace pensions market. It will fix the charges that members pay at the level of the cap.
“The promise to review the level of the cap in 2017 means charges could reduce further in future, but they will not reduce at the rate that would be seen if the market was truly competitive and open to active switching.”
Jonathan Lipkin, director of public policy at the Investment Management Association, warned that a charge cap is “not the best way to achieve good outcomes”. The IMA believes the main focus should be on improving governance structures and standards across the DC environment.
Consultant Ros Altmann warned that a worry is the 0.75 per cent cap only applies to the annual management charges, flagging up there are many other ongoing charges, including legal fees, administration and accounting.
She said: “The OFT [Office of Fair Trading] identified 18 different charges that have been imposed on pensions. These additional charges can add significant extra sums to the costs of workers’ pension schemes, therefore it will be vital to include other charges in any long-term cap.
“Initially, the DWP will require full disclosure, then once the evidence of the level of extra charges emerges by 2017, the cap may be changed. Capping total expense ratio would ultimately be better than AMC to prevent providers simply circumventing a cap with new charges.”
Gary Smith, head of DC consulting at Capita Employee Benefits, highlighted that large employers currently enjoy a much lower charge than 0.75 per cent, at 0.5 per cent.
He said: “So, the 0.75 per cent charge cap may mean that it becomes a ‘target’ for pension providers to work toward as opposed to a maximum threshold that should not be exceeded.
“Given the recent announcement that those approaching retirement will receive guidance - under the ‘guidance guarantee’- and, as the delivery of this guidance will be either from the trust or the provider, it may be that larger employers see their charges rise to accommodate the cost of this new duty.”
Others were positive on the plans, including a number of providers with fees already below the cap level such as Aegon.
Angela Seymour-Jackson, Aegon’s managing director for workplace solutions, said: “We welcome the clarity today’s announcement gives on the level of the price cap.
“Bringing in the change from April 2015 will allow providers, advisers and employers to plan ahead while continuing to make a success of auto-enrolment.”
Morten Nilsson, chief executive of of Now: Pensions, said: “A cap on charges will help to support the long term success of auto enrolment and build consumer confidence in pension saving.”
Mr Nilsson did, however, criticise the government for not applying the charge cap retrospectively, saying the changes “will be of little comfort to the thousands of people who are currently trapped in the funds of older schemes with high and disguised charges”.
Aegon was far more positive on the change.
