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Govt to cap pension charges at 0.75% from April 2015

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.

Charge cap table 1
Charge cap table 2

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Comments

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

  1. 0.75% of what? AMC, TER, total costs, Fund and platform?

  2. Interesting article especially as the headline saving we are seeing from some sources is in future pounds.
    Adjusting for inflation at 3% p.a., 3% p.a. income growth and a 7% p.a. investment return, for someone starting at age 18 on £20,000 and working through to age 67, I get an approximate saving of £7,500 in today’s value for all those 49 years. This would be approx £31/month if paid as a 5% annuity. Not to be sniffed at, but what if by doing this you might not be able to access investments achieving an additional 1% p.a. over the lifetime? – You’re then losing out by 0.75% p.a., not benefiting.
    Capping the charge may been seen as a good thing but providers can charge employers additional costs of admin and this may preclude the opportunity to invest in some of the best and most appropriate investments – cheap is not necessarily equated to suitable or appropriate.

  3. Quietly resigned 27th March 2014 at 3:46 pm

    And in other news, Steve Webb admits to being a member of the Max Clifford micro willy club.

  4. @ Balanced View

    Exactly – it’s already on the cards:

    http://www.moneymarketing.co.uk/news-and-analysis/pensions/standard-life-warns-employers-over-extra-auto-enrol-charge-cap-costs/2007312.article

    Providers will not be content to see their revenue drop, the costs will just be passed on to employers who, let’s face it, will chalk the cost up as part of their employment costs anyway. So ultimately the employee will still be paying the costs, it just means that it’s even less transparent for them than before.

  5. What happened to the FCA deciding that cost is no longer the main guide when choosing a product? Suitability, features etc are all worth considering and could arguably cost more.

    “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.” I can see AE going the way of stakeholder, as the government “tightens the pressure” on charges we’ll be left with a few providers that offer basic solutions that don’t really add any value to the AE process.

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