Aviva warns providers could revisit commission terms agreed with advisers prior to the RDR if the Government introduces a cap on pension charges.
Last week, pensions minister Steve Webb published a written ministerial statement setting out plans to consult on capping pension charges later this year.
This follows an Office of Fair Trading investigation into the pensions market, including the amount providers charge scheme members.
Webb says: “The OFT is investigating the whole workplace pensions market and we will act promptly and vigorously later this year in the light of their findings.
“In light of the forthcoming OFT report, the Government plans to publish a consultation this autumn. This will set out proposals including for introducing a charge cap.”
However, it remains unclear when such a cap would be introduced or at what level it would be set.
Aviva corporate benefits head of policy John Lawson says if policymakers cap charges below 1 per cent then providers would be forced to strip out pension scheme costs.
He says: “There will be problems if the Government set the cap significantly below 1 per cent.
“There are quite a lot of schemes charging between 0.8 per cent and 1 per cent that were written on a commission basis between three and five years ago.
“If the cap is squeezed too far then providers will be pushed into making some very difficult choices.
“If the cap was set very low then providers would need to cut costs somehow because you cannot operate at a loss. That would put pressure on things like ongoing commission payments.”
Although the Government has yet to confirm how the cap would be applied, Hargreaves Lansdown head of pensions research Tom McPhail says it would be “impossible” for the Government to cap charges across the market.
He says: “I think it would be impossible to apply a blanket charges cap because that would massively eliminate consumer choice.
“I am fairly confident any charge cap will be limited to default funds. It is not clear yet where they will pitch the level of the cap but once you get below 1 per cent – and most auto-enrolment schemes are already below 1 per cent – the difference you are making to an investor’s returns diminishes quite rapidly.”
According to the Association of British Insurers, the average charge for newly established auto-enrolment schemes is 0.52 per cent.
Keyte Ltd director Robin Keyte says: “I completely understand why the Government wants to cap charges and I think it is the right thing to do.
“I think the Government has genuine concerns that at the moment scheme charges, particularly where an adviser is involved, can be too high.
“I would expect any cap to be somewhere around the 1 per cent mark.”