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Minister warns over ‘loss leading’ auto-enrolment providers

Steve Webb 480 LibDems DWP

Pensions minister Steve Webb says there is a risk “loss leading” providers who sell schemes at artificially low prices to win auto-enrolment business will seek to recoup costs by hiking charges in the future.

Automatic enrolment started for the UK’s largest firms in October last year. The reform programme is being staged depending on firm size, with the smallest employers due to begin enrolling employees into a workplace scheme in 2018.

During a Department for Work and Pensions select committee yesterday, Webb (pictured) was asked whether pension providers could offer a scheme with a low charge to secure auto-enrolment business, only to steadily increase charges once a company has signed up.

He said: “It is a risk because the transaction costs of changing your auto-enrolment provider are pretty big.

“If a provider drifted its charges up quietly it would be a big decision for some employers to change because there are a lot of frictional costs involved.

“The key is for the employers to make it quite clear what the terms are when they sign up. I think allowing the provider to softly waft up prices is not a good contract to sign.

“We need to be sure when these contracts are signed that employers are not just aware of the rate they are getting on day one but that that is guaranteed for a period. That has to be kept a close eye on.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Steve Webb says there is a risk “loss leading” providers who sell schemes at artificially low prices to win auto-enrolment business

    “I want every provider to guarantee not to enrol people into high cost legacy schemes”.

    Which is it Steve?

  2. Dear Mr Webb. Welcome to the real world of business. If costs were artificially low then of course you cannot expect providers to keep losing money on them so what on earth did you think was going to happen? By the way Employers do not dictate terms to providers. As you will no doubt have no understanding of how the insurance world works let me explain in language that even a politician can understand. A pension (or life policy) is a contract of the utmost good faith entered into by a member (read that in this case as an employer) and a provider. The member is invited to commit to the contratct by way of an application (applictaion form) and by entering into it they agree to be bound by the terms of the contract. It is therefore an IMPOSSIBILITY for the member to dictate the terms of a contract they did not draw up, so please stop showing you hole-hearted ignorance by making such inane and stupid comments like the one you did about employers making the terms of the contract clear. As Del would say “What a plonker you really are”.

  3. DWP’s estimates for NEST must be a lot worse than expected to result in this type of comment.

    And what is more if the real driver behind this concern and some of the other “initiatives” is to make NEST more financially sound, then there will be problems.

    You can see the situation where the DWP try to squeeze regulation to increase the flow to NEST and the private sector pushes back via commercials, courts, proposition etc.

    He needs to take a deep breadth, go on holiday for 2 years and go back to being in opposition for the rest of his days

  4. During discussions with employers charges are the least of their concerns when looking at Auto enrolment. Undertanding the overly complex legisation and ‘what does it cost me’ along with ‘how it applies to my business’ will be at the top of the ‘items to know’ list. Charges have not even been brought up by the employers unless I mention it. Says it all really.

    Sorry Mr Webb but like most social experiments this one is a mess and needs more simple legislation.

  5. I thought that the FSA was dead against cross subsidy by providers and advisers.
    All these cheapo NEST providers must be balancing the books elsewhere.
    eg
    Online management
    Online biz submission
    Cuts to helpdesk staff
    Call centres in far flung Bombay, Madras or Bangalore
    Greater thresholds before renewal commission is paid out, so keeping our money on deposit longer to earn more interest that is never passed to us.

  6. @ Marty
    This Webb fellow is a ‘here today, gone tomorrow’ minister, who will just keep the plates spinning until he gets his coat and leaves in a reshuffle and passes the sorry mess to another lame, no hoper who’s got no grasp of the brief.

    The next one will mouth the same old platitudes. I bet you a pound to a pinch they have a drop down menu on their laptops that guides them through the hackneyed phrases.
    Pathetic

  7. Oh I guess NEST has it right then. Just charge more at the start with the promise to lower charges in future – and then presumably just renege when you see that maths not working.

    Good Lord and these people run the country – I wouldn’t let them run my bath!

  8. Surely prices should go down rather than up as FUM increases?
    Market forces will be the regulator and incentives will emerge to encourage large FUM schemes to transfer

  9. Let’s be honest. The only way auto enrolment is going through is because the government is forcing it through. There is no public appetite.

    Having already wiped out a third of the financial advice business, HMG now has its guns set on the pension business, the largest investor in the UK stockmarket. Most SME’s will opt for the cheap, but legally satisfying, NEST option. Any pension company who believes otherwise is deluding themselves.

    The financial services industry in the UK is under severe threat, shame as it is the biggest earner for UK Plc. Depression here we come……

  10. You also need to remember that NEST is a loss leader. Their true cost is not whatever their charges are PLUS whetever the tax payer burden turns out to be. We need to keep a very close eye on how much this is as something tells me (called experience) that whatever they have estimated will go up big time once reality starts to hit home.

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