Pension charges cap will lead to transparency

A cap on charges for auto-enrolment pension schemes will ensure the plans offer value for money and are transparent.

A report from the Office of Fair Trading (OFT) on its investigation into defined contribution (DC) pension schemes, which is also expected to include a recommendation for a cap on charges, was due to be published soon after Employee Benefits went to press. (The report was subsequently published on 19 September.)

However, the industry was in agreement about what was expected. Gary Moore (pictured), policy adviser: DC pensions at the National Association of Pension Funds (NAPF), said: “The focus is going to be on what people are paying and what they are getting for what they’re paying.”

Although a cap was not announced in the report, industry consensus was that this is needed.

In September, Legal and General announced it is to cap the charges for its auto-enrolment pension schemes at 0.5%. This will cover both the annual management charge for the administration of a DC pension and the charge for its default fund.

Adrian Boulding, pensions strategy director at Legal and General, said: “We think that having a single charge of 0.5% is something people will understand and if they understand the charges, it drives confidence.”

The NAPF has seen pension charges fall as larger employers have gone through auto-enrolment, but it expects this to change as small and medium-sized employers reach their staging dates. “Now we’re looking to a slightly less commercially attractive part of the market,” said Moore. “We need to keep an eye on what happens to charges and I think that’s why there is currently a lot of political pressure to keep charges low.”

Power added: “For small employers, the cost of offering an auto-enrolment pension plan, in terms of the administrative costs, will be very high. That is one of the reasons that a lot of existing insurance providers have steered away from that market.

“If you have a pension charge cap, say set at 0.75%, then the cost to administer it will be higher than the 0.75% charge. Therefore, [providers] would either not enter that market or leave that market. It would leave Nest [National Employment Savings Trust] as potentially the only choice, because it has to take everybody at a unitary pricing level.”

Legislation to ban consultancy charging on auto-enrolment pension schemes came into effect on 14 September.