I am astounded by the gaping hole in Lord McFall’s Workplace Retirement Income Commission report. How is it possible to do an authoritative review of the prospects for UK pensions without mentioning the RDR?
McFall has spent much of the airtime generated by the publication of the report steaming into the industry on the subject of high charges. Yet search the 86-page report as you may, you will not find a single reference to the RDR, adviser-charging or consultancy charging. I fail to see how it is possible to talk about charges on pensions without talking about the RDR.
McFall has provoked rage among advisers for his widely publicised criticisms of pensions charging 2 per cent a year. Forget 2 per cent, Lord McFall – under consultancy charging, employees could see 100 per cent of their first year’s employer and employee contributions disappear.
Right or wrong, this surely deserves a view from someone professing expertise in the evils of pension charges.
If you are going to attack the industry on charges, it makes sense to get your head out of the sand and refer to the new charging structure that is now less than 18 months away.
As to the 2 per cent charge issue, yes there are some old contracts knocking about with charges at that level but these are almost all individual personal pensions. A 2 per cent charge is virtually unheard of in the group pension area these days. And as Steve Bee has said, the regular-premium personal pension has been killed off by auto-enrolment. So McFall’s concern group is going to be almost completely serviced by group pensions.
If McFall’s call for a mandatory stakeholder-level cap for auto-enrolment is a way of saying adviser and consultancy charges under the RDR should be capped, then say so. Ignoring the issue altogether undermines the credibility of the report.
The effect of a move to a high up-front consultancy charge on those who move jobs even at an average rate will be devastating. The DWP has said a consultancy charge of 100 per cent of an employer’s and/or employee’s first year’s contributions will be acceptable. It may have reserved the right to cap charges in the future but when the RDR kicks off, at a time when tens of thousands of employers will be forced buyers of group pensions, it will be allowable to take all of an employee’s first year’s pension contributions.
It is the FSA, through the RDR, that is moving us from a mono-charge structure for workplace pensions to an up-front one. Consultancy charging, the workplace equivalent of adviser-charging, does precisely that.
Nest was quick to jump on the grave of mono-charge pensions with its decision to introduce a contribution charge which means that while the AMC for most workers will be around 0.5 per cent, the RIY for a 64-year-old will be 2.9 per cent.
If McFall’s call for the stake-holder charge cap to be maintained is an oblique way of addressing the issue of potentially high consultancy charges once RDR comes in, then why not say so? If he wants to see a cap on consultancy and adviser-charging levels, spell it out.
To be fair, McFall’s report covers a lot of ground and I support much of what he says about risk management, the need for new structures, cost-cutting through scale and the open market option.
But his report could have contributed to the debate on the massive changes coming down the line with the RDR.
John Greenwood is editor of Corporate Adviser