Pensions minister Steve Webb has confirmed the Government will cap auto-enrolment pension charges at 0.75 per cent from April next year.
The initial Department for Work and Pensions consultation, published in October, set out three possible charge cap options – 0.75 per cent, 1 per cent or a two-tier “comply or explain” model.
Webb has today confirmed a 0.75 per cent cap on default fund charges will be in place in April 2015. The cap will relate to funds under management.
The DWP says it has set out a high level principle of a cap on member-borne charges to prevent the industry creating new structures to work around the cap.
The DWP says: “In setting out a high level principle underlying the default fund charge cap (that it applies to all member-borne deductions paid to the pension provider or another third party, excluding transaction costs), rather than attempting to detail an exhaustive list, we are aiming to mitigate the risk of ‘waterbed’ effects, whereby charges could be hidden under new or false definitions.”
Transaction costs will be excluded from the charge cap but Webb says he is working with the FCA to boost transparency in this area.
The charge cap will be subject to a review in 2017 when the Government will consider lowering it from 0.75 per cent and including transaction costs.
Webb said: “This Government will be the first to get an iron-grip on the issue of pension charges. We are going to put charges in a vice and we will tighten the pressure year after year.
“Over the next 10 years the new charge cap will transfer around £200m from the profits of the pensions industry to the pockets of savers.”
There will also be new Independent Governance Committees for DC schemes. The committees must collect all data on charges and ensure value for money for scheme members, finding schemes with charges below 0.75 per cent if possible.
In addition, the DWP has developed “equivalency tables” (see Table 3.1 and 3.2 at the end of the article) to show how the charge cap will apply to schemes with dual charging structures such as Nest.
For example, a scheme with a 0.3 per cent funds under management charge plus a 1.5 per cent contribution charge is deemed to be levying an overall charge of 0.46 per cent.
The DWP originally proposed implementing the charge cap, alongside a series of minimum auto-enrolment quality standards, in April this year.
However, the Government subsequently agreed to delay the reforms until April 2015 ”at the earliest” to give employers more time to prepare.
The DWP assessment of the impact of a pension charge cap was branded “not fit for purpose” by the Regulatory Policy Committee because it failed to clearly show the affect it will have on pension providers.