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.”