The Regulatory Policy Committee at the Department for Business has ruled that the Department for Work and Pensions’ (DWP) impact assessment on a pension charges cap is ‘not fit for purpose’.
The DWP launched its consultation in October, which included a cap on pension charges at 0.75%.
The Regulatory Policy Committee said the evidence presented by the DWP did not adequately demonstrate that a cap on pension charges would have a zero net impact on the pensions industry.
In addition, it said that robust estimates for all options needed to be presented, so that consultees, and ultimately the final policy decision, are informed effectively.
A DWP spokesperson said: “We do not agree with this rating, which has no implications either for our proposals or for the consultation process.
“The reason for consulting on a charge cap was to gather evidence about the potential impact of our proposals on savers and the industry.
“Our final decision will be based on evidence we have received, not on our initial impact assessment.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The DWP conducted this consultation in a tearing hurry. In fact, it rushed it through so quickly that they failed to conduct their regulatory impact assessment properly.
“This means that the entire consultation process is now in doubt and will probably have to be rerun.
Sign up to our newsletters
Receive news and guidance on a range of HR issues direct to your inbox
“If the impact assessment figures were wrong then everyone involved in the consultation including employers, pension providers and the DWP’s own officials will have to reconsider their conclusions from the consultation.
“This will almost certainly mean a delay in the introduction of any charge cap on pensions, if one is introduced at all.”
The NAPF wants to see pension schemes that offer quality and value for money to scheme members and we welcomed the government’s consultation. However, the RPC’s finding is not altogether unexpected given the compressed consultation period on this important issue. On behalf of our members, and the 16 million people to whom they will provide retirement income, we have consistently counselled the government not to rush the consultation.
Despite the RPC’s opinion, the DWP still intends this legislation to take effect from April 2014, leaving no opportunity to lessen the breakneck pace at which this consultation and the subsequent legislation are being pursued.
We want to see effective and thoughtful reform introduced without delay, but rushed legislation is almost certain to provide unexpected, and unwelcome, consequences.
The Regulatory Policy Committee has stated that the impact assessment for the ‘Charges in Qualifying Pension Schemes’ consultation is not fit for purpose. Given the usually carefully measured tone of government bodies, this is a clear indication that the assessment has fallen short of giving a robust estimate of the true cost to the pensions industry. The committee states that the evidence presented does not adequately demonstrate why setting a charge cap is considered to have a zero net impact on the pensions industry.
The committee goes on to state, in line with a view expressed by the OFT, that a charge cap could result in some providers increasing charges to the cap and that the potential for this should be explored in greater detail.
The cost to employers of setting up alternative pension arrangements is also questioned by the committee. The impact assessment states that, if a cap of 0.75% is introduced, 90,000 employers will no longer be able to use their existing pension scheme for auto-enrolment. The impact assessment goes on to state that the transitional cost of setting up alternative pension provision would be around £55 million. This implies an individual employer cost of around £611, which we at Punter Southall believe is a significant underestimate.
In our response to the consultation, we suggested that the costs of successfully completing auto-enrolment for a smaller employer are an order of magnitude greater, at around £5,000 with the provider selection, negotiation and implementation costs being around £3,500. Therefore, a more accurate cost estimate would be £315 million.
Given the concerns raised by the Regulatory Policy Committee, we would urge the DWP to give a clear indication that any of the proposed changes will not be implemented for at least 12 months. This would give employers and the pensions industry time to deal with the huge numbers reaching their auto-enrolment staging date in the first half of 2014.
The government’s charges impact assessment has been shown the red card by its own Regulatory Policy Committee. This was a consultation that lacked detail and was built on sand. The government now needs to rethink and pick up the gauntlet thrown down by the recent Office of Fair Trading report to improve transparency and comparability across pensions.