On Wednesday (30 October), the government published its consultation setting out its long-awaited plans for capping pension scheme charges.
It proposed three possible options for the cap:
- A charge cap of 1% of the funds under management, reflecting the current stakeholder pension cap;
- A lower charge cap of 0.75%, reflecting the charging levels already being achieved by many schemes;
- A two-tier ‘comply-or-explain’ cap, which would set a standard cap of 0.75% for all default funds in DC qualifying schemes, with a higher cap of 1% available to employers that explained the reason for charges in excess of 0.75% to The Pensions Regulator.
Anything that reduces costs for employees and helps to increase the value of their retirement pot is a good thing, and it seems that many in the industry agree. But some have also questioned whether the government’s proposal goes far enough, suggesting a cap of 0.5%.
A pensions professional, with whom I was speaking before the consultation was published, suggested that placing a cap on charges could stifle innovation around investment returns and mechanisms to reduce volatility, if all providers shift their focus to racing to offer the lowest charges. It is a point of view I certainly hadn’t considered.
Let us know what you think.
Debbie Lovewell
Deputy Editor
@DebbieLovewell
Surely it is equally important to explain what the member gets for their annual management charge than it is focus solely on the amount?
While protecting the consumer appears to be at the heart of the Government’s proposal to cap pension scheme charges; is the result more likely to be a knee-jerk opposition to pension savings when employees realise the ‘actual’ net effect of their annual management charges?
There is a real danger that by highlighting the ACTUAL cost of a 1% AMC we could be doing more harm than good to the perception of pensions – at a time when it doesn’t need any more negative attention.
The OFT report and subsequent Government proposal has raised the issue of pension changes to a national level and there is now a real risk that people could start to make bad choices.
Companies must react now and pro-actively respond to the possible backlash by taking the opportunity to shed light on pension charges in general.
I think plenty of Providers will welcome the opportunity to increase their fund management charge to 0.75%.
If providers are required to cut their charges, remember that this will reduce their profit margins; less investment in IT and staff training, a less robust company. Equitable Life boasted about low charges.
That worked out well, didn’t it?