It looks like we won’t get a cap on pension charges – do we need one?

Josephine Cumbo, writing in the FT, has news.

Government plans to cap charges on workplace pensions will be shelved for at least a year, dealing a blow to pensions minister Steve Webb who pursued the policy despite industry opposition.

Designed to protect millions of workers being automatically enrolled into company pensions from paying high fees, the cap on charges above 0.75 per cent was meant to be introduced in April. The reforms have now been put back until next year at the earliest, according to insiders, meaning that they may not even take place during the current parliament.(FT -Jan 16 2013)

My information backs this up. Champagne and self-congratulatory press-releases all round at the ABI. An announcement is expected early next week.

Whether the stay of execution extends to commission and active member discounts I don’t know, but the source I spoke with yesterday morning had independently corroborated information that the charge cap has been kicked into the long grass.

Apparently, the key argument for those lobbying against was that the impact of the charge would be for insurers to pass on costs of auto-enrolment to small businesses.

This of course begs two questions, what are these costs (the original Government impact assessment talked of implementation costs for small employers around £100 a head) and secondly why it’s felt these costs should e borne from the pension pots of those enrolled, a large majority of whom are on the minimum wage.

The worst case scenario is that those in Government buy the idea that it is better to have a ruinously high fund charge (and precious little resulting pension) than have employers out of pocket (in a “fragile recession”).

I can’t help wondering whether this is a blow to the restoration of confidence in private pensions or not.

In our original submission to Government, the Pension PlayPen thought long and hard about whether the OFT were right and we did not need this extra intervention. We concluded that , to stop the legacy of workplace pensions set up with high charges, a cap would be needed. But there are other ways and there is a plan B.

The focus now shifts to the ABI and the progress it is making to set its house in order. Even if the Government leaves the qualifying rules for workplace pensions alone (and ditches the whole consultation) has enough awareness been created of the damage high charges and poor charging structures do, to put workplace pensions on a better footing-organically?

If the ABI are good to their word and set about reforming many of the bad practices within workplace pensions through the Independent Governance Committees they have agreed to set up through the AMCs, we will have achieved the improvement in member outcomes without intervention. A better win.

There are two things that give me hope. Firstly, I sense the ABI have got it, at least Otto Thorenson has, I’m seeing him this afternoon to discuss a way forward for the ABI  and the IGCs on monitoring transaction costs (hidden charges) and ensuring they do not get in the way of good pensions.

I met yesterday with TISA who are hell-bent on improving the lot of those trying to aggregate disparate DC pots and I have had meetings in the past seven days with senior executives of insurers who have clearly got the message that workplace pensions are not there to keep IFAs in golf club memberships.

But lest we lose sight of the prize or the scale of the mountain to be climbed, the Pensions Institute and our intrepid pension heroes Harrison Blake, left us in no doubt. For a synopsis of their findings in “Assessing Value for Money in DC pensions” press here. The full report and press release that summarises it are here .

We may go on kidding ourselves that because the costs of  pensions are hidden and complicated and depend on people understanding the impact of compound interest , these charges don’t matter. But they do, as Harrison Blake so ably show.

Workplace Pensions are able to bring auto-enrolment into disrepute and we must not let that happen. There are many good people within Pension Providers, in the room yesterday were the CEOs of several of them. But there are still organisations that don’t get it, who think that high charges are justifiable as a means of protecting their and their distributors high charges.

They don’t realise that the world has moved on. Not only is there a new regulatory climate in which commissions and consultancy charges are  unacceptable, but there is a new means of distribution (auto-enrolment) that makes sales commissions unnecessary.

Without distribution costs a major portion of workplace pensions is avoided (which is why the cost of new workplace pensions has fallen to 0.5%). With sensible investment strategies , good execution and good governance to keep it that way, a large amount of the money previously wasted in hidden charges can be taken back off the table. With a more sensible attitude to transfers and some of the suggestions in place (from TISA and others) we can get to a point where transfer pots are easily and cheaply transitioned and with a big heave from all involved we can start moving towards better means of decumulation.

None of this needs a charge cap and if we aren’t to get one, we should not despair. The major beneficiaries of not having a charge cap are the insurers who won’t be disrupted in this m their busiest hour (see my “should we give the ABI one last chance on charges” blog ).

I’d be lying to say I was not disappointed at this news, it sounds like a humiliating climb down for Steve Webb and his “full frontal assault on charges”. Gregg McClymont will be right to accuse the DWP of incompetence in its impact assessment and of addressing this too late in a parliamentary term for a proper debate to be had. The charge cap consultation has been a major distraction and (if nothing comes of it), people will have a right to tell the DWP to get their act together.

But the world goes on; if we cannot get better pensions through intervention, we will get them through good governance and the sword of Damocles still hangs over the heads of the insurers in the guise of a referral to the Competition Commission from the OFT.

A battle may have been lost but there is still a war to be won.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to It looks like we won’t get a cap on pension charges – do we need one?

  1. Steve Tiley says:

    Thank you Henry. A shame as you say, but let’s hope the FCA or tPR take a close look at any one pushing pensions that are designed for the benefit of the scheme managers or distributors rather than the members and small employers.

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