Pensions minister Steve Webb has confirmed that the introduction of a pensions charge cap will be delayed by a year until April 2015.
The charges cap was due to be introduced in April 2014.
A ban on active member discounts and defined contribution reforms on governance and transparency will also be delayed by a year.
In December, the Regulatory Policy Committee at the Department for Business ruled that the DWP’s impact assessment on a pension charges cap was ‘not fit for purpose’.
Webb (pictured) said: “We remain strongly minded to cap pension scheme charges in the default funds used for automatic-enrolment.
“However, we have consistently encouraged firms to start getting ready for automatic-enrolment twelve months ahead of the time the new employer duties apply to them.
“Therefore, to give those employers at least twelve months notice of the rules that will apply to them; I can confirm that any cap on charges will not be introduced before April 2015.”
Steve Webb is reported to have given a ‘categoric assurance’ that ministers will take action on pension charges. However, his statement to Parliament leaves some wriggle room on whether this will be through a cap; it says only that the government is ‘strongly minded’ to introduce one.
The minister has also confirmed that ‘any cap on charges will not be introduced before April 2015’, rather than that this will be definitely be the introduction date if a cap does go ahead, and his statement does not mention the specific 0.75% and 1.0% caps that were consulted on.
We were never convinced by Steve Webb’s original argument that he needed to rush the details through because ‘every passing month means another bunch of people who might not get put into a decent-quality scheme.
We firmly believe that no employees saving in a default workplace pension scheme should have to pay more than half a per cent a year of their retirement savings pot.
We have long been advocates of value for money pensions for the workplace and have avoided opaque charging structures such as active member discounts, consultancy charging fees and commission.
We continue to to hold the torch for low pension charges for all savers going forward.
Today’s announcement that a cap on charges for funds used by workers being automatically enrolled into company pensions will be introduced afterall, but not until April 2015, removes some of the uncertainty surrounding this issue.
Firstly this is good news in that the government appears to have accepted that any such cap cannot be introduced more immediately whilst many employers are in the middle of organising their auto-enrolment arrangements.
We still do not know, of course, at what level this cap is to be fixed, and exactly what it is expected to cover, eg. transaction charges, but it is hoped it will not be so low as to stifle innovation and create a “race to the bottom”. A figure of between 0.75% and 1% would appear to be appropriate, with a need for full transparency to enable employers to decide upon and secure the best terms for their employees.
In relation to legacy arrangements, including those schemes who must enroll their staff between now and April 2015, there probably needs to be a further period of grace, perhaps three years, to allow schemes time to adjust to the new cap.
Steve Webb is clearly dedicated to producing a workable charge cap that is realistic for providers and good value for members. A charge cap would present a radical change to the industry and would have knock on effects in many areas – for example the competitive environment – a cap may result in some providers withdrawing from the market and the active management focus of fund managers.
Our modelling indicates that high fees can have a major impact on member outcomes. A charge of 50 basis points can equate to a reduction of the eventual fund by 10%.
However, a charge cap must be thought through properly and consulted upon to deliver good outcomes for pension savers. The cheapest is not always the best so it is essential to get the balance between quality and price right.
Making a success of auto-enrolment is Aegon’s and the Government’s top priority. The decision to defer introducing any price restrictions until April 2015 supports this. It will allow employers and providers to get on with enrolling many thousands of employees into workplace schemes, often for the first time. Rushing new scheme conditions through at this critical stage would have disrupted many employers’ plans to use good existing schemes. The Pensions Minister’s decision will avoid employees losing out on valuable contributions while employers made alternative arrangements.
Aegon has already committed to participate in an industry-wide audit of existing schemes managed by an Independent Board. This will ensure all members – new and old – can have confidence they are receiving value for money from pensions.
The delay in the introduction of a pricing cap for pension schemes may allow for a more considered approach to any restrictions the Government is considering for auto-enrolment pension schemes.
However, the details of what criteria or charge cap may be introduced still remain unknown, and this casts a degree of uncertainty over any planning employers may be required to undertake now in order to meet their staging date requirements.
As with anything in life an assessment of whether something is value for money begins with what it costs. The problem the pensions industry has is that we are effectively quoting prices in different currencies and confusing the consumer. Our strong view is we need full transparency and a standardised way of charging for pensions so employers and employees can easily compare what it costs between different schemes.
We believe an all-inclusive annual management charge is the fairest way to do that. But we would be prepared to switch our own charging model to an agreed industry standard if it makes it easier for customers to directly compare one pension provider to another.
We cannot cap charges until we are absolutely clear what constitutes a charge. The hope is that reaching this standard is not delayed indefinitely and Government, regulators and the wider pensions industry get to grips with the issue sooner rather than later.
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