It was always going to end like this. Liberal Democrat pensions minister Steve Webb and his DWP colleagues’ attempts to force through a complex, market shuddering cap on automatic enrolment charges in the space of just six months has failed spectacularly.
The reform, which Webb wanted in place by April this year, would have seen charges on auto-enrolment default funds limited to 0.75 per cent, with schemes already set up given a year to transition. These plans have now been pushed back until 2015 at the earliest.
The Department for Work and Pensions also wants to ban active member discounts – where member fees are hiked when they change jobs – and is considering banning schemes with built-in adviser commission from being eligible for auto-enrolment.
The future of these two proposals remains unclear, although industry sources say the market has already implemented the AMD ban.
“Nobody is writing new auto-enrolment business with AMDs while the sword of Damocles is hanging over them, so the ban has already been effective,” one source says.
“There are still questions about how that ban will be executed. They could force all existing AMD schemes to move to a neutral price between active members and those who have left, or they could simply cap the lever price at the level of the charge cap.
“Those alternatives would have very different outcomes. If you just cap AMDs it is likely that you would not disturb the market, but if you ban them altogether then that would seriously disturb the market.”
In November, I argued the Government’s haste in getting the charge cap on the legislative books without clearly making the case for reform risked damaging the fragile reputation of auto-enrolment.
The credibility of the DWP’s own impact assessment has since been blown apart by the Government-appointed Regulatory Policy Committee, which described the document as “not fit for purpose”.
Furthermore, there are still vital questions about the reform that need to be answered. What exactly is the Government capping? What are the risks of including transaction costs? And how will a cap affect insurers’ solvency requirements?
These issues must be addressed before the Government interferes in the pension market. Thankfully, a rift between the DWP and the Treasury over the level of the cap means we will now have at least an extra year (and an extra consultation paper) to consider the implications of setting a price limit for auto-enrolment.
The key now is to make sure that year is used well. The Association of British Insurers and the Government must expedite a planned audit of old pension schemes to define the scale of the problem. In addition, policymakers need to get a handle on the myriad charges in the pension supply chain and work out exactly what should and should not be included in a price cap.
The Government has stumbled on an opportunity to make this reform credible – it must now grasp the opportunity with both hands.
Tom Selby is deputy head of news at Money Marketing – follow him on Twitter here