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How to make the 75 basis point cap worth your while

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How to advise on workplace pensions

But he adds: “Advisers typically will not get in trouble for recommending a multi-asset default fund costing 5 bps.”

Defaqto, in its report, lists some of the more common fees to look out for that can be applied to the employer and/or the employees, including:

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  • Application processing fee 
  • Middleware costs
  • Installation
  • Annual management fees
  • Annual investment/fund fees
  • Change of contribution 
  • Statutory communications
  • Transfer costs (in and out)
  • Changes in costs for individuals leaving employer so scheme becomes paid up
  • Exit fees for individuals on transfer
  • Exit fees for individuals on death 

Mixed reviews

The cap has received mixed reviews from many in the industry though.

Secretary of state at the Department for Work and Pensions Richard Harrington indicated in a ministerial statement in January on the forthcoming AE and annual thresholds review, the 0.75 per cent charge cap could undergo a potential revision. 

One disadvantage of the charge cap has been the impact on advisers.

Graham Peacock, managing director at Salvus Master Trust, points out: "The cap is a good idea for members but with an outright ban on commission, advisers have been frozen out. Advisers need to charge employers fees or deliver a service to an individual member.

"With written member consent, we will facilitate advice charges for transfer work – this is something very few workplace pension providers will facilitate.

"We developed this to help members get access to advice and (with consent) allow advisers to get remunerated for giving help and advice on pension consolidation and transfers in."

Stephen Coates, benefit consultant at JLT Employee Benefits, says the cap was “inevitable and welcome” but admits setting it at the right level was always going to be a challenge.

“Too high and it offers scope for the unscrupulous, too low and we end up with bland, vanilla propositions.”

He agrees with Mr Dixon, in that that if employer schemes are paying 75bps, they’re probably paying too much. 

“The reality is that market rates come in well below the cap,” he notes.

Lydia Fearn, head of defined contribution at Redington, acknowledges: "While there was initial concern the 0.75 per cent charge cap would have hampered innovation and schemes would find it difficult to create a well-diversified and managed default investment strategy, we have seen positive changes to funds.

"It is important that members are not over-charged for the investments they are in, particularly when they are relying on a default arrangement to help grow their pension savings – therefore it is a good idea."

But she would like to see the charge cap widened to include post-retirement arrangements too, so members are not on the receiving end of a sudden jump in charges once they access their pension savings.

Value first, price second?

Mr Coates reiterates the cap should be about value for money but the problem as he sees it is no-one has successfully defined what 75bps should buy you. 

“Until we know what good looks like, we just have charges and propositions,” he adds.