A political climb-down by the pensions minister or a 60 per cent increase in pension charges for hundreds of thousands of UK workers. Neither is particularly palatable for the Department for Work and Pensions. Yet one of these outcomes will have to be swallowed unless a massive fudge on active member discounts can be conjured up from somewhere.
Pensions minister Steve Webb will argue the current impasse is not his fault. He has been expressing his dislike of AMDs for quite some time now, yet the industry went ahead and cut deals that disadvantage former employees by stealth charges that rely on apathy, he will argue.
Pensions providers and advisers on the other hand will point out that both the FSA and the DWP knew a massive proportion of new schemes rushed through in the old days of commission were being done on an AMD basis yet the authorities sat idly by watching it happen.
Much of this work was done to get ahead of the curve on auto-enrolment before capacity became too much of an issue. To then ask the industry to undo all that work a few months before the first big wave of SME staging dates hits the sector seems like planning of the very lowest order, providers and advisers will argue.
In recent weeks, pensions minister Steve Webb has been very clear in his pronouncements on AMDs, giving strong indications that he expects them to be gone by the April 2014 deadline outlined in the DWP’s consultation.
My impression is that there is more wriggle-room around commission-based schemes than AMDs, not least because of the way the ABI has been given until the end of 2015 to complete its audit of commission and charges on legacy schemes. But when it comes to AMD’s, Webb has sounded unflinching in his expectation of their removal.
Yet for that to happen a considerable disruption of the market will be necessary.
Take my own scheme – it has a 0.3 per cent active and 0.7 per cent deferred charge. The provider simply cannot make any money on this scheme if it moves everyone to 0.3 per cent. Moving everyone to 0.5 per cent would be about the best the provider could probably do, although a simultaneous outlawing of commission would give providers more room for manoeuvre, although the pain would of course be passed on to advisers.
But switching from 0.3 per cent to 0.5 per cent would be a 60 per cent increase in pension charges. It doesn’t take much imagination to work out what the media will make that if such a repricing comes to pass, let alone what actual scheme members make of this fee hike.
The polarisation of the debate is evidence of just how successful the Office for Fair Trading has been in clarifying systemic issues in the UK pensions system and emboldened those calling for profound changes.
With issues such as a charge cap and the abolition of possibly all commission now seriously on the table, the collective public view of what is acceptable has shifted considerably towards stiff reforms.
But the authorities need to have mind for the real logistical obstacles that doing everything in one go will create. LEBC’s calculation that 90,000 schemes would need rebroking if a 0.75 per cent charge cap were introduced makes the point eloquently.
Flexible options remain – controls only on new business for now, a ban on AMDs only where the deferred charge exceeds any cap, the 0.75 per cent comply or explain cap itself. Criticism of the Government’s attitude on charges, caps and AMDs is vocal, yet at the extremes, deferred charges of over 1 per cent are challenging to justify, to say the least.
As with most arguments, both sides are partly right. The difficulty is going to be finding a way through the corner the industry is painted into without damaging the pensions brand even more.
John Greenwood is editor of Corporate Adviser