Pensions minister Steve Webb says the Government banned consultancy charging for auto-enrolment because the “compromise” solutions put forward by the industry would be too difficult to police.
Last week, the Department for Work and Pensions confirmed its intention to ban the charging method for automatic enrolment schemes.
A number of major providers, including Scottish Widows and Aegon, proposed consultancy charging guidelines designed to protect members from excessive fees as an alternative to a ban.
In an interview with Money Marketing, Webb says: “All the compromise solutions put forward were complex and would have given mixed messages to the public. With front-loaded consultancy charges there was also a concern that people who changed jobs would keep getting hit in their early years of membership.”
Some in the industry, including the Association of British Insurers, argue the ban on consultancy charging will put the success of auto-enrolment at risk if it results in small businesses shunning advice.
Asked whether he thinks this is a significant risk, Webb says: “No, I do not. When you look at the smallest firms, the majority are likely to end up in Nest.
“The basic compliance with auto-enrolment is a non-advised process. You ought to be able to comply with the law as required without having to pay someone to advise you.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “Our experience to date is that the vast majority of employers do need some hand- holding for auto-enrolment.”
The Government also plans to consult on introducing a cap on charges for pension default funds in the autumn. Webb says this is necessary to “protect the reputation of automatic enrolment”.
He says: “The reputation of auto-enrolment is like a ming vase. It is going really well but the nightmare scenario is it comes crashing down because of extreme bad practice or poor value.
“When the staging process is completed, there is also the danger that the market becomes very stodgy and employers are unwilling to switch provider.
“At that stage, charges might start to drift up, so one of the attractions of a cap is putting a lid on that risk.”