It is just over one year in to the great auto-enrolment experiment and everything appears to be going smoothly so far.
Opt-out numbers appear to be at the low end of the estimated level, with just 8 per cent of potential members leaving, and so far The Pensions Regulator has had to take little action over non-compliance.
However, there are a few clouds on the auto-enrolment horizon as the number of firms that meet their staging dates increases exponentially over the next 12 months. This has led to widespread concerns about the capacity of product providers and payroll companies to meet this sharp increase in demand over the next two years.
However, the biggest potential stumbling block to the success of auto-enrolment could be the Government itself.
At the end of last month, following the publication of an Office of Fair Trading report on pensions charges, the DWP criticised the industry over the level of charges paid by members of workplace DC schemes and has launched a consultation over reducing the level of charges to 1 per cent or even 0.75 per cent.
In addition, the DWP has said it could ban the use of active member discounts. Both these measures could apply to all existing workplace schemes, not just for new schemes.
Last week, Hargreaves Lansdown head of pension research Tom McPhail said the DWP’s figures used to justify a charge cap could be compared to the Blair government’s Iraq war “dodgy dossier” for its selective use of facts to justify its arguments.
But this was only the most high profile attack on the DWP’s constant revision of the auto-enrolment rules.
Advice firm LEBC says as many as 90,000 schemes will have to be reviewed if the DWP goes ahead and implement the charge cap and active member discount ban.
Divisional director Glynn Jones says, “How is the pensions industry expected to cope at a time when tens of thousands of new auto-enrolment schemes are having to be set up next year for SMEs?
“For an employer having to undertake a review, there would be significant additional financial costs. This seems particularly unfair as they have already taken the responsible route, with incurred costs, of establishing a pension scheme for their employees to comply. So through no fault of their own, the goal posts are effectively being moved and they would be expected to pick up the tab.”
It has also been suggested that rather than reduce pension costs, the clamour for a pension provider from employers will actually push prices up. Many new workplace schemes are already being established on an annual charge of 0.5 per cent, but if providers can cherry pick their new business, this could be pushed up.
Creative Auto Enrolment managing director David White says: “This consultation is likely to increase uncertainty amongst providers, meaning the looming capacity crunch could be even more severe than we initially thought, impairing small businesses’ ability to meet their auto enrolment requirements in time.
“Whilst capping charges could give smaller businesses more clarity around pension schemes, it is more likely that a cap on pension charges would make it more difficult for businesses handling auto enrolment alone to secure terms from pension providers going forward. A cap on charges will see pension providers becoming even choosier – potentially leading to less competition on charges.”
While it is widely acknowledged that there are many legacy schemes with excessively high charges, the focus on charges for new schemes also runs the risk of reducing further innovation in the market.
Barnett Waddingham partner Mark Futcher says: “Pension charges have reduced significantly over the decades, and most schemes set up in recent years have been competitively priced.
“If we keep battering charges down – this could also have the negative effect of stifling innovation and competition in the market. We have already seen many competitors pull out of the market.”
In addition, by continuing to drive costs down to the minimum possible level, the services offered by providers will also be reduced.
Recent research from Scottish Widows shows large parts of the public are still ignorant of the new pension system, with 21 per cent of those earning less than £30,000 unaware of the new pension rules and 44 per cent unaware of how much their employer contributes to their pension.
The concern is that putting further downward pressure on charges the DWP is reducing the ability or willingness of pension providers to provide information and education to new scheme members.
Futcher says: “Charges need to be viewed in context – it is the overall value that is important. Good quality education, engagement and governance are important factors and we have seen much legislation and best practice guidance in this area. In many cases good investment proposition can outweigh the impact of charges – investments should always be judged net of fees.”