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Kim North: Charge cap may hit small firms hardest

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So the charge cap for auto enrolment is to be 0.75 per cent from April 2015.

It is a shame that this cap was not announced from the launch day of auto enrolment back in October 2012 as over 10,000 firms have already auto-enrolled their staff and many of these schemes have been set up with a charge higher than 0.75 per cent.

According to Jelf employee benefits consultants, 26 per cent of employers currently have a pension scheme in place that does not meet the 0.75 per cent charge cap. If over 2,500 companies need to renegotiate their existing auto enrolment scheme terms this will inevitably add to the expected capacity crunch for the large auto-enrolment providers.   

Smaller schemes which have a charge above 0.75 per cent will be hit the hardest and the employer has decisions to make. Last week, Scottish Widows said they were bringing in the 0.75 per cent charge a year early, from this month, so good on them.

Standard Life said that existing schemes with less than 50 employees which do not have at least £150 per month per member average across the scheme (allowing for 2018 step ups) which have higher than a 0.75 per cent charge will see their charge reduced to 0.75 per cent. However, a scheme management fee will be applied costing the employer £1,200 a year. Standard Life have set the benchmark and I expect other life and pension providers to follow by charging an extra fee for the smaller schemes.

Employers will not be happy with this fee which will not have been accounted for in their cash flow. The Pensions Regulator’s research states that the cost to employers is the main consideration in selecting a scheme. Will cash strapped employers look for another auto-enrolment provider to avoid paying a fee?

The transferring of auto-enrolment pots may become more difficult as providers become more selective as over 30,000 employers reach their staging dates this year.

Small pots being transferred in with small premiums to follow is not exactly attractive for the grindingly slow administration departments of the big PLC life and pension companies. Employers cannot default to Nest to take the transfers as they will not accept transfers until at least April 2017. 

The DWP in its “consultation on charging” paper talks about legislating for a pot-follows-member system of automatic transfers as part of the Pension Bill. With people changing jobs on average 11 times during their working life and therefore accruing small pots as they go due to auto-enrolment, who is expected to switch these pots without a chunky administration fee?

Following the Budget a lot of attention has focused on whether savers will take their entire fund as cash, Lamborghini sales and the death, or not, of annuities. However, more emphasis should be put on getting money into pensions via auto-enrolment in an efficient and cost effective way or we will end up with a nation that will not have to worry about draw down at retirement as they won’t have saved enough in their pension fund.

Kim North (kim@techandtech.co.uk) is managing director of Technology and Technical

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There is one comment at the moment, we would love to hear your opinion too.

  1. Alasdair Walker 29th April 2014 at 1:07 pm

    My reading of the runes is that insurance companies aren’t the right solution for most auto enrolment cases anyway.

    * Higher charges than the trust-based schemes.
    * Less transparent investment process.
    * Legacy IT systems causing problems.
    * Lack of willingness to embrace payroll services.

    The last point is key – it’s becoming more and more apparent that the best solutions are those that allow the payroll software to handle the assessment and communication to the employees.

    Between NEST, Now and the People’s Pension, what is the need for insurance companies in the group market going forward?

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