Twelve months ago we were talking about how consultancy charging might work. Fast forward a year and we now have talk not only of the removal of all commission but a charge cap, possibly even as low as 0.5 per cent. I cannot recall a time when perceptions of what is acceptable in workplace pensions have changed so rapidly.
There are two key issues for the charge cap debate – when and at what level.
Pension minister Steve Webb’s consultation talks about April 2014 for people staging from that point. It is hard to imagine, when the pensions minister comes back from his Christmas deliberations, that he is going to ask employers who got their house in order ahead of time and put in a scheme at more than 0.75 per cent that they have got to go and do it all again.
Let’s not forget that both the Department for Work and Pensions and The Pensions Regulator, not to mention Nest, have been out there telling employers to start at least six months in advance to make sure they do not miss their staging date. Now they want to change the rules for those staging three months in the future.
Would an April 2014 cap apply to all schemes or just those newly set up for auto-enrolment? It is hard to create rules that separate the two. As has been widely reported, we will see mass rebroking if the minister sticks to his timetable.
Why the hurry? If the Government is minded to go for a cap, why not make clear what it will be but say it will only be implemented in one or two years time?
We do need some perspective on just how much will be saved by going for an early cap. For someone on £30,000, 2 per cent of band earnings adds up to contributions of just £411.20. Implementing a 0.75 per cent cap on a scheme that currently has a 1 per cent charge will save them precisely £1.03 in a year, not taking into account investment growth, of course.
The actual level of the cap itself is considerably more complicated and the debate around what is in and what is out is clearly crucial.
Legal & General’s suggestion that the DWP should go for a 0.5 per cent charge cap has been described as opportunistic by virtually everyone except those also offering low cost master trusts. If I had not just been sent text from an L&G letter to an adviser rejecting terms because “the minimum number of eligible members that we typically offer group pension scheme terms on is 50. We would also require a monthly average contribution of £200 per member,” then I might be more convinced by its arguments.
The problem is, we are not comparing apples with apples. GPPs have different rules to master trusts – capital adequacy requirements and the obligation to send illustrations out to joiners to name but two.
And some providers are also wrapping up implementation assistance into their charges, while L&G and Nest are not.
There is an argument to say that employees should not pay for implementation and that unbundling the two is the fairer approach. But the DWP will also reflect on wanting to make life as easy as possible for as many employers as possible as the 2014 juggernaut gets into top gear.
Then we have the innovation argument. Will a 0.75 per cent cap stifle innovation in DC investment solutions? It is hard to imagine how it could for any schemes of any scale. And the comply or explain option certainly gives adequate scope for providers and managers to innovate.
With decent investment options out there at or around 0.5 per cent, it is hard to see in today’s market how more than 1 per cent could be spent in a way that would add real value.
For providers and advisers working in the small employer end of the market, that will mean separating out set up work and ongoing admin charges. And that will mean charging employers. That may not have been the norm a year ago, but times have changed.
John Greenwood is editor of Corporate Adviser