It would be wrong to dismiss concerns about a pension charge cap as the greedy bleatings of those desperate to cling on to higher margins.
The proposed cap of 0.75-1 per cent and, in particular, the suggestion all current schemes may need to be rewritten and stripped of commission could lead to a number of unintended consequences for employers and their staff.
Banning commission on all qualifying schemes and forcing them to be rewritten would be a very expensive exercise for employers already struggling with auto-enrolment costs.
The reduction in costs to employees is unlikely to be significant. ABI research suggests average pre-RDR GPP charges of 0.77 per cent and many are much lower than this.
The real problem is the charges and exit penalties levied on older schemes, which is being addressed through the ABI past business review demanded by the Office of Fair Trading.
Forcing schemes to be rebroked with commission stripped out may lead to employees paying a similar AMC but insurers keeping the commission which previously paid for advice.
Employers could be forced to reduce employee contributions to make up for the extra advice and arrangement costs required.
The Government admits a charge cap could mean less provider choice. A resource-sapping rebroking exercise will lead to more providers pulling back from offering new schemes.
Competition has already led to average AMCs on new schemes falling to 0.5 per cent. The Government’s big concern is that although competition is working for larger schemes, it may not for smaller schemes and a line in the sand needs to be drawn. It is also worried built-in commission acts as a disincentive for advisers to review schemes.
These legitimate concerns could be addressed through regular five yearly scheme reviews, an idea floated by Royal London chief executive Phil Loney in this issue and worthy of further investigation.
Charges can significantly cut into future pension incomes and the Government must be alive to this threat. All investment costs, including dealing costs should be disclosed to investors. We do not, however, believe such costs should be included in any cap as this would hit savers by removing important investment flexibility.
But after the OFT rejected calls for a charge cap and with market competition driving down charges far lower than its proposed ceiling, the Government must tread with care to ensure its reforms do not harm the people it is trying to protect.