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Employers face with-profits charge cap headache

Employers using old-style with-profits funds for auto-enrolment could be forced to switch schemes after the Government included certain structures within the 0.75 per cent charge cap.

A Department for Work and Pensions consultation response, published today, confirms details of how a proposed charge cap carve-out for schemes with “third party promises” will apply in practice.

And while with-profits policies with guarantees attached will be exempt from the cap, those which simply offer to smooth returns for members will need to comply.

Standard Life head of pensions strategy Jamie Jenkins says the firm has clients running stakeholder with-profits schemes that will fall within the cap.

He says: “Under stakeholder we designed with-profits back in 2001 that benefits from smoothing but doesn’t have a guarantee.

“It falls within the scope of the cap and we are fine with that. We will either have to reduce the charge or move people on to something else, but either way nobody is losing any guarantees.”

It is not yet clear precisely how many employers will need to alter their with-profits scheme ahead of April, when the charge cap comes into force.

The DWP also says it will tighten the “third party promises” definition amid concerns some may look to work round the cap.

This is because, under the original definition, the carve-out would have applied to a default fund if there was a third party promise anywhere in the scheme – regardless of whether members of the default fund itself benefited from the promise.

It says: “After considering all of the responses we agree that the exemption should be tightened because, as drafted, the default arrangement would not be subject to the cap even if the third party promise related to a different fund within the same scheme, which did not form part of the default arrangement.”



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