The Department for Work and Pensions (DWP) has launched a consultation into charges on workplace pension schemes.
Better workplace pensions: a consultation on charging, follows the Office of Fair Trading’s (OFT) market study into defined contribution (DC) pensions, which was published in September.
The DWP’s proposals include:
- Mandating disclosure for pension scheme members to ensure a consistent approach across providers and schemes, and to improve the coverage to include all scheme members.
- Standardising disclosure for employers to introduce a standard framework for the disclosure of costs, charges and the services provided both at the point of sale and on an ongoing basis.
- Introducing a cap on pension scheme charges for all members, both active and deferred, of default funds in qualifying DC schemes for employers that stage from April 2014, before extending this cap to capture all employers that have staged from October 2012, up to and including March 2014, by April 2015.
- A ban on differential charging between active and deferred members in DC qualifying schemes. This would address active member discounts.
- The ban on consultancy charges should be extended from auto-enrolment schemes to all qualifying DC schemes.
- A ban on adviser commissions set up prior to the introduction of the retail distribution review (RDR).
The proposal for the cap on pension charges has been split into three options: a charge cap of 1% of the funds under management, reflecting the current stakeholder pension cap; a lower charge cap of 0.75%, reflecting the charging levels already being achieved by many schemes; and a two-tier ‘comply-or-explain’ cap, which would set a standard cap of 0.75% for all default funds in DC qualifying schemes, while a higher cap of 1% would be available to employers that explained the reason for charges in excess of 0.75% to The Pensions Regulator.
The consultation opened on 30 October and will close on 28 November 2013.
Steve Webb (pictured), pensions minister, said: “In May, I signaled the government’s intention to consult further on the issue of charges in workplace schemes.
“As the Office of Fair Trading noted in its recent report, Defined contribution workplace pension market study, a weak demand side in a complex market has the potential to prevent some members from benefiting from price competition.
“While I am pleased that some large employers setting up schemes for automatic-enrolment are getting good deals for their employees, there is a real risk that SMEs [small and medium-sized enterprises] will struggle to negotiate the same low charges or will use high-charging legacy schemes. When small differences in charges can make a significant difference to final retirement incomes, this is an area where we cannot afford to be complacent.
“Therefore, through this consultation, we want to assess what can be done to improve transparency in pension scheme charges and to look at whether there is a role for the government in improving disclosure.
“We also want to test the case for capping default fund charges and have offered a range of structures to help tease out some of the various issues.”
This could be good news for employees as it can potentially increase the value of a pension pot considerably. It is also further evidence the government is focused on addressing perceived obstacles to the successful implementation to auto enrolment.
The Pensions Regulator already suggests employers should be choosing schemes that give members value for money. This announcement makes it even more important that employers ask their advisers for detailed information regarding costs and potentially now ensure that they are in the low range suggested by consultation.
For those that have already passed their auto-enrolment staging date and put a scheme in place, or are using an older scheme with an annual management charge of more than 1%, it is vital that they ensure their advisers keep them up to date with the outcome of the consultation.
If the proposed cap is adopted, it is important that guidance is provided by the government for these employers so that they are not penalised for any their previous choice.
We have long been arguing for clearer, simpler and more transparent pension charges. Today’s consultation is a step in the right direction and a positive contribution to the debate.
However, before considering capping charges, you need to introduce a standard charging structure. This is essential to safeguard consumers, enhance competition and ultimately improve consumer outcomes. Without this transparency and consistency, DWP efforts to drive down costs could prove futile, with consumers being the ones to suffer.
Our view is that pension providers should focus on value for money – giving the best product possible at the cheapest possible price – rather than inventing new and often obscure methods of charging.
High charges can impact on retirement income, particularly when compounded over many years of saving, and I welcome some action by the government to curtail overly high pension charges.
However, it is important to remember that while charges are a drag on performance, they are only one part of the equation in terms of the final size of an individual’s pension at retirement – it is the contributions paid into a pension that have the most impact on a retiree’s final pension.
Charges need to be viewed in context – it is the overall value that is important. Good quality education, engagement and governance are important factors and we have seen much legislation and best practice guidance in this area. In many cases good investment proposition can outweigh the impact of charges – investment should always be judged net of return.
The worst examples of rip-off charges lie with defined contribution schemes set up many years ago, often including initial charges and monthly charges, as well as annual management charges well above 1% per annum. Pension charges have reduced significantly over the decades, and most schemes set up in recent years have been competitively priced.
If we keep battering charges down this could also have the negative effect of stifling innovation and competition in the market. We have already seen many competitors pull out of the market.
Lower charges are positive for pension savers and should encourage people to put more aside for their retirement. The government needs to ensure, however, that it does not prompt a wholesale decline in the quality of pension schemes, just as millions of people are due to be automatically enrolled into them.
Competition on charges in workplace pensions is fierce and schemes set up today already offer members very good value. The main problem in the market, as identified by the OFT, is older schemes, in particular those set up prior to 2001.
Employers with these schemes should review the market as they can almost certainly get a better deal now. Individuals invested in these schemes should review their pension and consider switching to a more modern plan.
The NAPF wants to see pension schemes that offer quality and value for money to scheme members.
Charges should be seen as part of a bigger picture that includes quality of services provided to savers through their working life and a robust investment strategy that generates good returns.
The NAPF believes that transparency, good governance and scale are important in ensuring good member outcomes. The NAPF will be responding to the government consultation.
We agree that too many company pension schemes offer poor value to employees and steps should be taken to address this. However, we must ensure that any cap, while reducing costs for employees, doesn’t disadvantage them significantly in other ways.
If a cap is imposed, then product providers will need to put aside additional capital reserves. There is a real danger that this could lead to some providers pulling out of the market or offering a reduced level of service.
Similarly, auto-enrolment is already facing capacity issues, with far more companies due to reach their staging date than there is capacity for traditional product providers to accept new schemes. Providers are already being very selective about the schemes they will accept and will become even more so as smaller companies reach their staging dates.
So, while charges are clearly an important consideration, there is a danger that setting a cap too low could lead to employees being faced with less choice, inferior products and a lack of ongoing service.
We have seen calls for a cap lower than 0.75% in some quarters, notably from Legal and General. It is important to note that they will only accept business that is profitable for them at a 0.5% charge. This means that they only offer auto-enrolment schemes to companies that they consider to be ‘high quality’ and profitable at that level, all others are turned away.
To negate the risks of employee detriment we would therefore support a cap being set at 1% (although would expect many schemes to charge significantly less), with a review in the future to see if it should be altered.
JLT Employee Benefits welcomes the government’s initiative to cap pension charges on auto-enrolment. Capping is in everybody’s interest and is fundamentally a good thing as it will transform pensions into a public utility.
By ensuring that every penny paid into a pension works as hard as possible, we will build the public’s trust in pensions, which will ultimately encourage people to save more through their pension funds. With the current minimum contribution rate considered too low to afford pensioners a comfortable income, fostering a saving-for-retirement culture is a crucial foundation element of a sustainable pension system.
Our view is that no one needs to pay more than 0.5% for a standard pension, so 0.75% is a reasonable level that leaves some room for introducing innovation and choice. However, it is up to the industry to step up to the plate and make it work. To achieve this, we need to agree how to calculate annual management charge equivalents where there are contribution charges and flat-rate charges.
We will also have to ensure that legacy schemes can lower their costs as easily as possible and communicate the results of this action to their members effectively, so they understand the benefits.
In the interest of value for money for consumers, nobody should have to pay more than half a percent for auto-enrolment. 0.5% is the benchmark for value, and large schemes have already demonstrated that it’s perfectly achievable. All consumers deserve this level
of value, whatever the size of firm they work for. Smaller employers can club together, such as in a master trust, and harness this level of value for their workforce too.
There are plenty of additional services that some people will find worth paying more for. Wider investment choice, financial advice, auto-escalation programmes are all things that members could choose to pay more for. But the basic pension that everybody is defaulted into by their employer should cost no more than half a percent.
There are two ways forward. The pensions minister could use his statutory powers to impose a cap equivalent to 0.5% per annum. Or, The Pensions Regulator could let it be known that employers who choose to auto-enrol people into schemes with higher charges than the state provider NEST levies are exposing themselves to challenge that they have disadvantaged their staff. The open-ended threat of future
regulatory action may be just as effective as a statutory price cap.
A charge cap only looks at what people are paying and not at what they are getting for their money. No one should take too much comfort from the fact that their scheme is within this cap: 0.75% is still above the odds for a basic product and a great many large employers’ schemes charge less than this.
At the same time, the lower the charge cap is set, the more the government risks ensuring that only basic products could fit underneath it. If investing in a broader range of asset classes is expected to improve outcomes at retirement, regulations should not prevent trustees from designing default funds that do this.
So it is better to complement a charge cap with measures focused on the causes of unnecessarily high charges than to set the charge cap lower as low as possible. The Office of Fair Trading’s recommendation that employees should not be enrolled into schemes that still pay commission to the employer’s adviser could help here, as could the Financial Conduct Authority’s clampdown on ‘backdoor commission’.
Nudging people into pensions through automatic enrolment meant the government was going to share in the blame if pensions were not delivering value for money and probably made a charge cap inevitable. However, there will be a lot of devil in the detail. For example, not all charges are a simple percentage of account value. Converting contribution levies or flat-rate administration fees into a charge that can be compared with the 0.75% cap will require some assumptions about how long the member is in the scheme for.
The DWP consultation has rightly focused on the key area of cost. With auto-enrolment, large employers have had their staging date and, in many cases, have implemented a scheme with good terms negotiated for their members. The next tier, smaller companies, simply don’t have the same market clout to negotiate those more favourable terms, so charges for them, and their members, will be higher.
We have used the experience gained from talking to schemes to structure our own, soon to be launched, auto-enrolment solution, with charges of 0.50%, significantly below the 0.75% advocated in the DWP’s consultation paper.
The cost burden of auto-enrolment will be big news for SMEs next year with 36,000 businesses having to comply in the first six months of 2014, each taking an average of 103 working days to do so.
While capping charges could give smaller businesses more clarity around pension schemes, it is more likely that a cap on pension charges would make it more difficult for businesses handling auto-enrolment alone to secure terms from pension providers going forward.
A cap on charges will see pension providers becoming even choosier – potentially leading to less competition on charges.
This consultation is likely to increase uncertainty among providers, meaning the looming capacity crunch could be even more severe than we initially thought, impairing small businesses’ ability to meet their auto-enrolment requirements in time.
This announcement means even more that the message to businesses that haven’t yet staged is clear: Dind a partner that can deliver an auto-enrolment solution and get in their queue. Now.
Anything that can be done to help improve the transparency and efficiency of pensions products and encourage greater levels of savings participation is a good thing. In this context the debate on potential capping of pension charges is very welcome, provided it is part of a wider discussion around creating pension solutions which have customer value at its core.
It is not just about low cost and full transparency over charges. Capping the fee at 0.75% would not help the customer whose investment return on their hard-earned pot was so low as to have a net loss after inflation.
What’s important is the ‘value for money’ delivered to savers – the fee paid, the investment return, other features and benefits all need to be included in the mix. And it goes without saying that workers also need additional support to help them understand how their pension scheme works and to help them make important decisions.
For the industry, fixing the future is also only part of the equation. The value created for customers in existing pensions schemes is also in need of review. For example, anything that can be done to help consolidate and rationalise pension products and schemes must be a good thing.
The inherent complexity of legacy products, systems, regulation of legacy schemes is a challenge providers cannot resolve own their own and will need both encouragement and help from the regulator.