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Govt urged to clarify how charge cap applies to complex legacy schemes

Pension experts are urging the Government to clarify how the automatic enrolment charge cap will apply to complex legacy charging structures.

Last month, pensions minister Steve Webb confirmed a 0.75 per cent cap on default fund charges will be in place for all auto-enrolment qualifying schemes from April 2015. The cap will relate to funds under management.

But applying the cap is complicated by the myriad charging structures that exist in the UK pensions market. Nest, for example, levies a 1.8 per cent charge on contributions in addition to a 0.3 per cent annual management charge.

In a bid to address this, the Department for Work and Pensions has devised “equivalency tables” showing how the cap will apply to different charging structures (see Table 3.1 and Table 3.2).

This means 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 for the purposes of the cap.

A market study by the Office of Fair Trading last year found 18 different names for charges that can be paid by members in schemes set up before 2001.

Aegon regulatory strategy director Steven Cameron says it is unclear how the proposed charge cap will apply to schemes that do not operate either a flat AMC, an AMC plus a policy fee or an AMC plus a percentage contribution charge. 

He says: “While more complex structures are rare for brand new schemes, the industry will need to assess every existing scheme that an employer wants to use as a qualifying scheme against the price cap.

“There might be a scheme that has an AMC of 0.6 per cent, a contribution charge of 2 per cent, a policy fee of £1 per month and a mechanism to reduce the AMC by 0.2 per cent if fund value exceeds, say, £50,000.

“It may be possible to use the DWP methodology for more complex charging structures such as this but we need urgent clarity from DWP on how this should be done.”

Charge cap table 1
Charge cap table 2

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