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Impact of the pension charge cap

This article is part of
Guide to Pension Charges

The effects of the charge cap will not fully be known for some time - although Standard Life’s decision to impose a monthly charge for smaller employers could portend other similar changes to charges already agreed for qualifying auto-enrolment schemes.

In fact, the move by the firm to impose a £100 monthly member fee for employers with less than 50 staff and average contributions below £150pm might be seen by some as a preferential outcome, given predictions that a cap of 0.75 would drive the departure of many providers from the market altogether.

Prior to the announcement of the cap, Morten Nilsson, chief executive of Now Pensions, said a pension charge cap might reduce the number of players operating in the automatic enrolment market.

He warned we have already seen some players pulling out of the workplace pensions market as they simply do not view it as profitable while others have been selective, cherry picking only the best business and not wanting to concern themselves with serving the mass market.

A charge cap set at 1 per cent or 0.75 per cent would mean some providers will withdraw their offerings for smaller employers, Ronnie Morgan, strategic market insight manager of Scottish Life, had similarly cautioned.

Mr Morgan also said the cap could lead, effectively, to charges being higher than they might in some cases and would reduce pricing pressure.

“There would be very little market pressure to fall below the level of the cap. It is notable that the recent OFT review of workplace pensions rejected price capping.”

The government has sought to head this off by signalling an intent to look at reducing the level of the cap further in the coming years.

Mr Morgan added: “The exit of providers from the market as a consequence of a cap would lead to more small employers going to Nest, the government funded default.

“Nest deducts upfront charges of 1.8 per cent from employee contributions, in addition to the usual annual management charge.

“This charging structure represents particularly poor value for employees who leave their employer after less than five years in the scheme, who will take with them a pension pot diminished by equivalent annual charges of between 3.8 per cent (if they leave after one year) and 1 per cent (if they leave after five years).”

Nest’s charges are considered to be less than 0.5 per cent - reflecting the schemes prior insistence that this was its effective fee over a ‘saving lifetime’.

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