What’s this charge cap really going to cost? (1000th blog)

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There has been a furore this week following the publication of the  Regulatory Policy Committee’s “Opinion” on the DWP’s Impact Assessment (IA) of Charges in Qualifying Pension Schemes.

Of all the things to have a furore over, this would seem one of the more obscure; however, any document that opens  “The IA is not fit for purpose” is likely to grab headlines, especially from that part of the financial press for whom any curb on commission is considered detrimental to its readership.

So this week’s FT Adviser’s festive blog was cheerily titled “DWP charge cap credibility in tatters after latest rebuke” and calls for the consultation to be extended to April 2018 ,when staging of all firms will be completed.

There are three reasons why the IA is wrong

1. It was done in a hurry

2. It was done by people who are junior and not clued up

3.It was done to support the Minister’s favoured outcome – the provision of a charge cap.

For all three reasons, the IA is not fit for purpose, I have said as much in previous blogs The numbers are as farcical as those in the DWP IA for the employer costs of AE implementation.

But this is really missing the point. The costs of moving the thick end of half the current workplace schemes from old to new charging structures is going to be way more than £19.7m. The impact of the new charging structures on the embedded value of the insurance companies will be a multiple of this. Cost and impact are different. Cost refers to the cheques written, impact refers to the revenues lost.

I’m not sure why the DWP consistently do this. It really is a feeble way of going about things. The last thing you should do, when pushing for better disclosure is not disclose the cost and impact of what you are proposing. Nor should we be frightened of the revised numbers (whatever they are).

As I’ve written in previous blogs, the biggest issue is not the financial impact, but the lack of time and expertise within the pension providers to put things right. The ABI are arguing that if they are forced to devote all their resource to moving failing schemes to new schemes, they won’t be able to get any schemes into shape for auto-enrolment. Or at least they won’t be able to keep up with the run rate that rises sharply in 2014 and peaks around July.

I am sure the ABI are right. Nobody yet as gone short on underestimating the capacity of UK insurers to implement measures that cost them money upfront and lose them value over time. The question is one of political will. The banks are currently processing some 4m PPI claims, they have brought in a small army of contractors to make this happen.

The insurers have taken substantial impairments already, as a result of the RDR and the abandonment of consultancy charging. If there was an absolute imperative for them to participate in auto-enrolment, they could and would resource up as the banks have had to do.

But there is no such imperative. There are other markets and these are global companies. Aviva is run by a Kiwi, Scottish Equitable is now a Dutch Company Aegon , Eagle Star by the Swiss company Zurich. Whereas in 2000 when the Stakeholder legislation was drafted, it could be argued that UK workplace pensions were the only game in town, this is not the case today. The Far and Middle East beckon.

The true cost of the options considered by the DWP (2 and 3 in their paper) cannot be assessed by the DWP as they have neither the skill or the capacity to understand insurance company finances. The issue is an irrelevance. The question is whether the insurance industry have the capacity to put their houses in order. As the ABI themselves argue, the question of how to sort out the legacy , should be a matter for their internal governance committees.

And it really is a matter for each insurer to decide. Some – like Fidelity  and BlackRock have virtually no toxic  legacy to worry about. They can expect to be net winners. Other insurers – notably L&G (but I suspect there are others) see a move to a low charge cap and a ban on toxic  legacy practices within AE as a chance to win back confidence in (their) pensions. There are a few remaining insurers who have really huge problems with toxic legacy books who will either “stick or twist”. These include Aviva, Standard Life, Scottish Life, Friends Life , Aegon and Scottish Widows.

In the past four weeks I have changed my position with regards these insurers. Even at the start of the consultation period (when we made our submission), I was prepared to accept the IA of the DWP at face value and answered the DWP’s question “can the insurer’s manage the implications of the cap within “business as usual” with a resounding “yes they can”.

My position is now “well they could but why should they?”.

And now the ball is with Steve Webb. The DWP seem in no mood to compromise on commission , AMDs and full charging disclosure. If they pursue their current course, we could find ourselves with a walk-out by the insurers with toxic legacies (who will be joining a long-list of companies such as the Prudential who have already resigned from the game). Can Steve Webb and his successors see auto-enrolment through with a reduced team of providers or will the potential withdrawal of the old guard of insurers imperil the exercise?

This is one of the critical questions facing auto-enrolment prior to the next election and it is one the DWP have to answer in the next few days. The timetable to April 2014 does not give them a chance to fudge the issue.

Why do I support going easy on the insurers?

Firstly because I think we need as many as possible playing for as long as possible for the sake of employers, members and the long  term pensions strategy we are embarked upon

Secondly because I see the withdrawal of these providers as giving credence to the arguments of those who are lined up to pull auto-enrolment post 2015 (which I think would be a bad thing)

And thirdly, no matter how craven the behaviour of some insurers towards their distributors, I do not think that those insurers who are trying to support auto-enrolment, should have to bear the cost of it alone.

We need a general amnesty which gives the insurers the time and space to get their toxic books in order. If that means that they have until 2018 to sort out the legacy issues, I would support that compromise.

That doesn’t mean I don’t support the removal of AMDs and commission. I will be doing all I can to help insurers to clean up their acts (we are developing tools on the PlayPen and First Actuarial). But ringing out the old and ringing in the new should be managed with a little more responsibility than the approach adopted by the DWP through their dodgy Impact Assessment.

This article first appeared at www.pensionplaypen.com/topthinking

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in club pension, dc pensions, defined aspiration, governance, Liberal Democrats, pension playpen, pensions, Popcorn Pensions, Retail Distribution Review, Retirement. Bookmark the permalink.

2 Responses to What’s this charge cap really going to cost? (1000th blog)

  1. Gerard Dufficy says:

    Your reference to Stephen Lawrence is as unnecessary as it is inappropriate. Seeking such a cheap analogy might make some of your Sunday morning readers sit-up and take notice, but others will see that you have blithely used the tragic death of an innocent young man, merely to strengthen your argument on a contentious area of pension provision. I did not read the rest of the article.
    Whilst I have always respected your views and enjoyed your passionate delivery, this time you have gone too far, and I shall not be reading your articles again.

    Gerard Dufficy ACII
    Regional Director
    LEBC Group Ltd
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  2. henry tapper says:


    I don’t intend to offend and so have removed the reference to the killers of Stephen Lawrence.

    For the avoidance of doubt,I have no time for Stephen Lawrence’s killers nor for the behaviour of the authorities who let them walk free.

    If my writing was clumsy enough to suggest that I mentioned his killer’s behaviour “blitherly”, then I am at fault and apologise.

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