Why we will always need a charge cap on workplace pensions.


Tony Filbin



Tony Filbin has commented feelingly to comments made by Jonathan Parker of Redington, suggesting the charge cap “hinders value for money“.

People with short memories and/or lack of experience misunderstand the cost drivers of corporate pension providers.

Prior to the charge cap being introduced a large portion of cost was centred around distribution particularly commission which the OFT recognised in their weak buy side statement.OFT

Take this out of the equation with auto enrolment and add the benefits of new technology and 75bps can easily accommodate both value for money and improved guided member outcomes provided you are a scale player.

Modern defaults with active asset allocation passively executed are delivering better investment solutions. It is a total myth that low charges means poor outcomes just as in the pre cap days high charges didn’t necessarily mean good outcomes.

Of course it is important to choose a committed provider who has a sustainable model and has embraced the need to get their own cost house in order before embarking on the journey to providing great member outcomes; – they are out there so don’t be distracted by those who say it can’t be done.

If you want to understand just what the alternative to a charge cap looks like, here is New Model Adviser’s analysis of what those in today’s SIPPs are paying by way of fees.

NMA charges

When John Denham introduced the first charge cap (the 1% Stakeholder charge cap at the turn of the millennium), the DWP published the statement that a 1% pa charge reduced the pension by 27% over a typical contract. At the time, the total cost of ownership on personal pensions was estimated at around 2% pa.

Let’s be clear about this, 27% is more than a quarter of the pot; in terms of lifestyle, it’s the same as telling someone they are getting a pay cut of more than a quarter of their income FOR THE REST OF THEIR LIVES.


In a separate piece of research by New Model Adviser, the estimated average cost of advice (as a percentage of assets in the pot) has risen from 0.50% in 2013 (the outset of RDR) to 0.87% today.

The research “Advice fees are going up and there is no evidence that they will come down”, suggests that there is no market or regulatory pressure to curb the cost of advice.

And that’s just the start of it.

One of the consequence of MIFID II, introduced on Jan 3rd 2018, was supposed to be full disclosure not just of the overt costs of pension management, but those that drag back performance and have never preciously been revealed.

A quick look through SIPP disclosures yesterday shows that with the exception of SCM Direct, none of these costs is being properly displayed. They are not displayed in the NMA tables above and were they to be so, I estimate that the total cost of ownership of SIPPs would increase by between 0% and 0.36% pa (this is the range of “slippage” identified in the 23 IGC reports I’ve analysed in the past month.

I may be underestimating “slippage” (the price we pay for transitioning within funds). Workplace Pensions tend to use funds which are large and conservatively managed, many SIPP portfolios contain funds which are smaller and aggressively managed. If published, slippage in many SIPPs could well exceed the range I’ve given in the para above.

The alternative to a charge cap

Jonathan Parker is a friend, he has spent his recent career working for pension providers (Zurich) , Fund Managers (Dimensional) and now a top-end investment consultancy (Redington). He has been working in a bubble of best practice.

What he doesn’t see is how the world operates outside the bubble.

While I appreciate that consultancies like Redington, fund managers like Dimensional and insurers like Zurich, would like to offer high value – high price investment products, I am fiercely opposed to those products being offered as defaults within workplace pensions.

If people choose to pay high fees, they are free to do so and yes “high fees can represent value for money”. My experience is that whether you are a steelworker in Port Talbot or a top-end City Professional, you will find it hard to get value for money from advice costing 0.86% pa of your fund, from product costs, typically around 1.00% pa.

I do not believe that the vast majority of people entering workplace pensions have the first clue about what they are paying or whether they are getting value for money. That is why it is so important that IGCs and trustee boards help them out.

If you read the Old Mutual IGC report, you will see that the old “Skandia” workplace pensions are still managing money at rates comparable to those in the tables above. That is because they are still paying trail commission to advisers and because they are not subject to the cap. Old Mutual’ s IGC  (like most SIPP providers) have not got round to properly telling policyholders their hidden costs – we’ll have to wait till April 2019 for them.

Old Mutual VFM3

The point is that – without a cap – the costs of workplace pensions would be driven up to the levels of SIPPs – or in Old Mutual’s case – remain what they were pre RDR.

Old Mutual VFM2

add 0.25% to these costs to include “hidden fees”



This is not all gloom

The fact is that over one million employers are operating workplace pensions under auto-enrolment within the 0.75% charge cap. While the charge cap does not include the hidden costs identified by MIFID II, most people will have their workplace savings managed considerably cheaper than they might previously have expected.

Most people will get zero value for paying for financial advice on their workplace pension, just as they got zero value for the commission that they paid financial advisers pre RDR. So the ban on advisory fees on workplace pensions has had zero effect on most people saving in the workplace, other than to protect their funds from fee attrition.

I am quite sure that the schemes Redington advise on, would not suffer from taking away the charge cap. These schemes offer members great value for money, albeit at considerable cost to employers who pick up the consultancy fees of Redington.

But these schemes are few in number. Redington would like to provide value for money consultancy to IGCs and I’m quite sure that providers would be delighted if Redington could get the charge cap lifted on defaults. This would enable advisers to do to workplace pensions what they have done to SIPPs (see tables above).

I am not suggesting that this is Jonathan Parker’s or Redington’s  intention. But if you live inside a bubble, you sometimes miss what is going on outside. I very much doubt that anyone in Redington has any idea of what happened in Port Talbot and what was the destination of the £34.2bn of money transferred out of DB plans through CETVs.

The charge cap is of critical importance and must stay.

  • We live in a naughty world. If we lived in a perfect world we would not need a charge cap.
  • People who suggest we would get better value for money without a charge cap should look at SIPP charges (above)
  • The £34.2 bn transferred out of DB last year was generally invested in high cost SIPPs not in low-cost workplace pensions
  • SIPP costs (including advice) have increased since RDR, workplace pension costs have fallen.
  • We should push for more and better disclosure of hidden fees. The abuse of MIFID II since January is already a disgrace
  • Regulators need to make it clear what the impact of high charges is, why workplace pensions have charge caps and why these caps aren’t going away.

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 Why we will always need a charge cap on workplace pensions.

  1. John Mather says:

    There are many observations on the argument of price v value I see no reason to impose uniformity it is a free market, we should invest in educating the public from an early age. This is not what we do as a society we teach how to borrow to consume, fiddling as Britain burns. Even more worrying is the race to compliant mediocrity “If you’re not prepared to be wrong, you’ll never come up with anything original.”
    Watch SirKenRobinson’s classic TED Talk about how schools can nurture creativity: http://bit.ly/2rsrove #TeacherAppreciationDay

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