The coalition Government has got itself in a tangle over price capping.
While ministers appear reluctant to act in the energy market (where prices are going up), the Department for Work and Pensions is attempting to hurry through a proposed cap on auto-enrolment pension charges (where prices are going down).
I have no idea why this is. There has been some pressure on the Government over “excessive” pension charges – particularly from consumer organisations and in national newspapers – but nowhere near the outrage at energy companies’ double-digit price hikes.
Even pensions minister Steve Webb doesn’t appear to perceive high auto-enrolment pension charges as a significant issue.
Responding to claims from Labour leader Ed Miliband in July 2012 that pension charges were a “massive, massive problem”, Webb said: “We do not perceive that lots of people are about to be auto-enrolled into bad value pension schemes, quite the contrary.
“We will be looking at charges very closely as auto-enrolment develops and as small firms begin auto-enrolling their employees but we are not going to stir up cheap headlines for the sake of it.”
On top of this, the Office of Fair Trading’s report into workplace pensions – which did not make for pretty reading for the industry – did not recommend a price cap and instead instructed the Association of British Insurers to lead an audit of its members’ charges.
This audit will be completed at the end of 2014 and I’m told DWP officials were “in the room” when this was agreed. It would therefore be sensible, you would think, to use the information garnered during this exercise to inform a decision on capping charges.
After all, a charge cap will only work if you know what you’re capping.
Except now the Government has moved the goalposts, giving stakeholders until the end of this month to feed into a consultation which proposes setting a cap on auto-enrolment default funds of between 0.75 per cent and 1 per cent in April next year.
The ABI says it will continue with the audit on the timetable set out by the OFT, meaning the industry will spend time and money carrying out an exercise which is utterly pointless. The costs of doing the audit will, of course, eventually trickle down to policyholders.
Other potential issues arising from a charge cap, some of which could have huge ramifications for savers, have been glossed over by the DWP.
For example, the consultation dedicates less than a page to the impact a charge cap will have on the capital insurers need to hold in reserve. The Government thinks they might have to hold a bit more – but it’s not sure.
And what about the impact on the businesses charged with implementing auto-enrolment? The DWP impact assessment acknowledges these businesses could be forced to choose an alternative scheme as a result of the cap but fails to consider other costs.
Hargreaves Lansdown head of pensions research Tom McPhail says: “The DWP only takes account of the cost of choosing an alternative scheme if an employer’s charges exceed the cap in its impact assessment.
“What they have not taken any consideration of is that if you cap the charges on the scheme, some of the administration costs which are currently paid from the scheme will be pushed out of the scheme and onto the employer.
“So the employer will then have to pay higher fees to payroll providers or service providers. None of that has been accounted for in the impact assessment.”
Then there’s the proposal to ban active member discounts – a ludicrous idea in the context of a charge cap which would mean a scheme with an active member discount charge of 0.7 per cent would be prohibited, while an equivalent scheme with a flat annual management charge of 0.75 per cent would be allowed.
Labour shadow pensions minister Gregg McClymont says if he was in power today he would wait for the ABI audit to be published before capping charges – a far more sensible approach to what is a very serious intervention into the auto-enrolment pensions market.
Government interference in any market should not be taken lightly. But by rushing through its consultation on capping charges, the DWP leaves itself exposed to all manner of unintended consequences.
Tom Selby is deputy head of news at Money Marketing