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Govt sets out options on auto-enrol charge cap at 0.75%-1%

Options include a charge cap of 1 per cent, 0.75 per cent or a two-tier “comply or explain” cap.

The Government has proposed an auto-enrolment charge cap of 0.75 per cent which insurers warn will raise industry costs by over £1bn.

The cap would cover all relevant charges such as administration fees and contribution fees. The Government is also considering including transactions costs within the cap and banning active member discounts altogether.

A report by the Office of Fair Trading, published in September, found over 186,000 pension pots representing assets worth £2.65bn have an annual charge above 1 per cent.

The Government is consulting on a charge cap of 1 per cent, 0.75 per cent or a two-tier “comply or explain” cap. Under the “comply or explain” proposal, employers would have access to a 1 per cent charge cap but would have to explain to The Pensions Regulator why the scheme charges over 0.75 per cent.

Pensions minister Steve Webb says: “The Government believes enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges. We are consulting on a cap on pension charges. A range of options will be on the table, including an outright ban on all charges above 0.75 per cent per year.”

The Government wants to introduce the cap from April 2014 for all employers with auto-enrolment staging dates from April 2014 onwards. Employers who staged between October 2012 and March 2014 will be given until April 2015 to comply with the cap.

Aviva head of policy, pensions and investments John Lawson says: “Any cap comes with a cost because when insurers provide guarantees, we have to hold regulatory capital to match that guarantee.”

He says regardless of the level of the cap, insurers will have to hold an extra 1 per cent of assets in reserve if a cap is introduced, equating to an extra capital requirement of £1.1bn for the £110bn in insured assets.

Lawson adds: “Charge caps are a bad idea for insurers full stop, regardless of the level of the charge cap.”

Aegon regulatory strategy director Steven Cameron says: “Insurers would need to hold more capital in reserve if the Government caps charges.

“Obviously a charge cap would limit how much of that cost you can pass on to customers initially but capital intensive products need to be paid for. I think it is more likely that cost efficiencies will not be passed on to customers in the future.”

Worldwide Financial Planning IFA Nick McBreen says: “A charge cap will be a nightmare to implement. The risk for advisers is they will be hamstrung because they will only be able to recommend a scheme for auto-enrolment which meets these requirements.” 

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Steve – Your starter for 0.75

    Please explain how NEST will qualify – or are they exempt? Perhaps if we were all allowed to charge 2% or so at outset we may have something approaching a level playing field.

  2. Steve Webb should be focusing on Employers who are increasing the minimum contribution rate to put off employess joining the schemes. It should be made law that if the employee wants to pay the minimum then that is all they have to pay.

    I do agree with Steve Webb that the employer should pay for the scheme to be set up – if they want advice on how to set it up. If the employer doesnt want to pay then they can try and work it out for themselves.

    People dont have to use Nest but I do think that all providers should have a cap on their charges. The employer can use which provider they think offers best value for money. You would hope that Steve Webb is consulting with the Providers. I hope Steve Webb hasnt just made this statement to stop the trails being paid to advisers as this could simply be stopped by other means. People should only pay for a service that they are receiving and what the Adviser receives should be agreed by each member of the pension scheme. The days of getting paid for doing nothing should be long gone!

  3. @ David Stoddart

    Ah a man (amongst many others) who evidently believes that businesses are benefit agencies.

    Also the post seems to assume that all you need for a pension is initial advice and then put everyone into default funds and gently simmer for 30 years or so for a wonderful outcome.

    Is that hope over experience? Is on going advice worth having and if so how much should be paid for it? Should that advice be for individual members or one solution fits all? Can individual advice be covered by the overall cap?

    When members suddenly see the value of their pot after all those years is not exactly much over (or heaven forbid – even less) than the premiums paid how happy will they be?

    Is Mr Webb going to guarantee a minimum level of return ahead of inflation?

  4. @ Harry Katz

    I do not believe Businesses are benefit agencies, however, having transparent charges and making the employer pay the fees for setting up the scheme will reduce some employees ending off with 3 or 4 different pension schemes over their lifetime because a ‘So Called Financial Adviser’ (I prefer to call them Product Salespeople) has wanted to make more money by keep setting up new schemes.

    I am not saying people should not review their pensions, far from it, I believe they should be reviewed, however, I believe the client (employee) should have the choice to decide to have it reviewed and should also have the freedom to decide who reviews it and they should be able to compare Financial Advisers fees for reviewing their pension.

    Welcome to the real world. Either step on board or be left behind.

  5. @ David Stoddart

    I’m well into the real world. All my clients have individual pensions. All pay fees. All have annual (at least ) reviews. No group schemes at all. All my SMEs employees have their own individual plans. The employer contributes by single premiums. This is linked to the fortunes of the company and the performance of the employee. Salary sacrifice is common. Ergo minimum admin and disruption for the company, no and pension regulation or reporting – allowing the firm concentrate on the day job and is not tied into fixed costs. The employee has individual control and one size fits all is unknown.

    Is that real enough?

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