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Royal London: Govt has ‘grossly underestimated’ charge cap costs

Royal London chief executive Phil Loney has attacked the Government’s pension charge cap reforms, saying the costs have been “grossly underestimated” and could yet hit £1bn.

Announcing the company’s interim results this morning, Loney argues the Department for Work and Pensions’ “headline-grabbing policy” to cap automatic-enrolment charges at 0.75 per cent from next April “will have precisely the opposite consequence to that which is intended.”

Loney says: “We believe this Government intervention will only distort a market that was already moving in favour of lower charges for pension scheme members due to scale economies from auto-enrolment.”

He goes on to attack pensions minister Steve Webb’s claims that pension providers total revenue would but cut by £200m over 10 years as a result of the charge cap.

He says: “The provisions for the pension charge cap that we have seen from pension providers during this reporting period suggests this is a gross underestimate. We estimate the total reduction in long term insurer income may well reach £1bn.

“This seems to me to be an unacceptable margin for error in the Government’s understanding of the impact of its actions, and the size of the impact is driving many insurers to introduce employer fee arrangements to mitigate against the impact of further reductions in the price cap. I hope that present and future governments will think carefully about these consequences before lowering the cap further, not least because the impact of price capping is likely to fall increasingly on the hard pressed SME sector.”

Royal London reported a 45 per cent fall in pre-tax profit to £139m for the six months to the end of June.

But the value of new business was up 31 per cent year-on-year from £1.7bn to £2.3bn.

Group pensions business was up a massive 91 per cent to £1.06bn, while individual pensions business was up 15 per cent to £609m. Drawdown business was up 19 per cent to £358m, but protection business fell 33 per cent to £161m.

Royal London Asset Management added £1.32bn of net business in the first half of the year – £1bn more than the same time last year.

Royal London’s platform, Ascentric, fared less well as it took in £651m of net new assets, down 25 per cent compared to the first half of 2013. Ascentric has around £8bn assets under administration.

Most of the new RLAM business was wholesale, while the firm’s outflows were cut back to just £540m. In the first six months of 2013, £963m flowed out of the business.

Wholesale flows were £745m and most of the money went into equity income and credit funds. RLAM also secured a new mandate from the Hertfordshire County Council, among the £569m institutional flows. 

The firm had £77bn in assets under management at 30 June, up by more than half again on a year earlier, boosted by the purchase of the £20bn Co-operative Asset Management business in July last year.Royal

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  1. Let’s face it ~ the government nearly always underestimates the costs of whatever it decides to impose on the public sector, whilst at the same time its own costs for just about everything are colossal. It’s not as if we’ve not been there before with stakeholder pensions.

    If Royal London (and others) see no profit in trying to run schemes subject to the government’s charge cap, they should just write off their involvement in this sector of the market. Anecdotally, advisers who’ve tried to build a profitable offering in the AE market have been sorely disappointed.

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