Advisers should beware of providers trying to dodge the charge cap on default pension funds by opening new schemes, Aviva head of pensions policy John Lawson warns.
The Government’s latest paper on charges levied on auto–enrolment funds reveals more details on the 0.75 per cent charge cap, including the omission of schemes that offer guaranteed investment returns, executive schemes, and Small Self Administered Schemes with fewer than 12 members from the restrictions.
Towers Watson senior consultant Will Aitken says: “The cap will not apply to former employees who stopped contributing to a scheme’s default fund before 6 April 2015.
“Even the past savings of some current employees could be out of scope if their future contributions are diverted to a new fund that charges less.”
Lawson says advisers need to watch out for providers “deliberately closing schemes and opening up new schemes” to avoid the cap.
He says: “The rules allow you to close a scheme on 5 April and open a brand new one, so that will impact the charge only on ongoing contributions, not for the old funds.
“With our existing active members we’ll reduce the price on their current fund to 0.75 per cent or less so all their funds are switched to the lower charge as well. Some schemes might have to close anyway because the charging is so complex, but we’ll see even providers with schemes with single charging structures opening up new schemes because they don’t have to cut charges for active members on their past funds. Advisers should keep a really close eye on that.”
Legal & General pensions strategy director Adrian Boulding says the paper failed to properly address an issue around contract law that may prevent members saving into a low cost fund.
He says providers currently need to ask members for permission before moving them from old, higher charging default funds to new, cap-compliant ones and that “typically only half of members respond” to the invitation to switch.
Boulding wants an “overriding power to enable the provider to redirect member contributions”.
The exclusion of transaction costs from the cap, some of which are paid by members, has been contentious since the idea was introduced. The paper confirms these costs will not be included, but says it will be reconsidered in 2017.
Lawson says it is “fair” not to include transaction costs in the cap.
He says: “It’s a complex issue and not all schemes can account for that cost at the moment. You’ve got to be careful that it doesn’t encourage certain types of behaviour – a cap on transaction costs might persuade managers not to trade or to invest in funds that don’t trade.
“So you might get the perverse situation where managers deliberately don’t trade to stay within a 0.75 cap and that’s not necessarily in the interests of the consumer.”
Pension PlayPen founder Henry Tapper says the issue of transaction costs remains on the FCA’s agenda.
He says: “It has not been kicked into the long grass.”
Rob Reid, director, Syndaxi Chartered Financial Planners
The Government has fudged this by saying they’re going to look at transaction costs in a few years’ time. I can’t understand why that has got kicked into the long grass. I am unimpressed and I think they’ve put it on the “too difficult” pile.