Supermarkets object to price caps, pensions should long ago have ditched a price cap on workplace pensions for the same reason.

In my supermarket you can pay well over the price of a pint of milk for a pint of “Duchy Organic” milk that would bust through any price cap because the cows that made it live a pampered lifestyle in a lovely field near Windsor Castle (or at least that’s what we all believe).

The man from Marks & Spencer said

“it was not the government’s job to run businesses and it should instead implement changes to tax and other regulations to limit price increases for consumers”.

I agree, my family now shops in Aldi in preference to M&S for staples and we go to Waitrose and M&S for treats. The consumer for food is smart enough not to need protecting, the market gave us Aldi and Lidl because we were fed up with paying more than we needed to.

As with food, so with financial services? Sometimes we do need caps.

Martin Lewis teaches us a number of ways to compare what we are buying from insurance on our cars and houses to savings rates. We know what we are buying and pay the right price, sometimes paying more where we are not sure of the rival’s product.

But in 2012, 2013, 2014 and so on through to 2018, employers were purchasing savings vehicles (hoping one day to be pensions) that were being sold on investments that Steve Webb and the DWP could easily be rigged so crooks could make off with vulnerable savers money. The 0.75% cap on total charges was implemented in 2014 because the employers, diminishing in size and sophistication as Auto enrolment staging continued, needed to be protected from buying rubbish for their staff.

We had come off a financial service crisis that happened when banks were allowed to get away with it and  there were many players in the AE world keen to charge commissions for all kinds of things that could have made AE a scandal. Webb was right to put a charge cap in place.

But when charge caps lead to price wars?

There comes a time when charge caps work against the consumer. This has happened with AE savings schemes. Some deals done between providers and employers have seen the charge on the saving vehicle bottom out at 0.1% pa. The BT GPP set up by Standard Life is an example. It is a great deal for plain vanilla investments but leaves no space to turn pots into pensions and savers , when they move to decumulate their savings find themselves in unregulated drawdown products (technically personal pensions) that have no cap.

The alternative for most savers is to take the cash and run. Better to have the cash in the bank, pay the tax and get out of some contract you neither understand or trust.

The weird thing about the cap is that even at 0.75% pa  it has massively distorted the pension market to a point where pensions have been driven out.

So what of other areas of pensions? Is every pension capped for charges?

I’ve mentioned the Personal Pension, now known as the Self Invested Personal Pension to make sure that we do not confuse it with workplace pensions . These are wealth management pensions which have been used as wealth protectors (hence the hatred of the IHT changes). They are not subject to a charge cap because to do so would make them unadvisable and uninvestable by wealth managers.

But there are other pensions that are not subject to charge caps. Occupational pensions, including LGPS and USS, do not have to worry about investment costs and incur substantial costs investing in such obscure areas as private credit, private infrastructure and infrastructure. These charge- busting investments are now being scrutinised by Reform UK for VFM but not by TPR or FCA or PRA. That is because no charge cap exists for occupational pensions where the sponsor is underwriting the payment of guaranteed pensions. The council tax payer for instance, guarantees that council workers will get paid a promised pension by LGPS.

We have never felt it right to cap the charges of DB plans because this type of pension is “institutional”, the charges are not paid by members (as in workplace pensions) but by the employers who have an institutional relationship with fiduciaries (usually trustees) who are bound to get best value in the market.

So where’s the problem?

The problem is where the services required by savers expand to include pensions (decumulation as the workplace savings organisations call them). The Pension Schemes Act requires workplace savings products to offer regular income for the rest of people’s lives and to do so either through CDC or some form of flex and fix – ending in an annuity.

At the same time these savings plans are being asked to live with the Mansion House Accord which means that savings and presumable decumulation funds will be required to invest in a more expensive way than has been the normal since the charge cap arrived.

Investment costs for savings plans could be virtually nothing where all that was happening was “accumulation” and index-tracking passive funds were available for next to nothing from investment houses who lived on wafer-thin markets, subsidised by stock lending.

But now things are changing. The emphasis of the Government is that saving includes investment in private markets (with a threat of Government intervention if it doesn’t happen). Mandation is not quite a charge but it has the same impact, requiring savings companies to offer workplace pensions within very tight charging limits. This is because of the charge war that saw voluntary agreements between employers and providers that made charges incredibly low.

And while investment costs are rising, so the threat of having to provide “pensions” whether through retirement CDC or flex and fix means more work and more expense to the savings organisations. Many of the prices negotiated will be hard for providers to increase.

This is why the charge cap may become a problem!

Some DC workplace pension plans will need to renegotiate deals , put prices up and while these won’t be to 0.75% , they will be fought by member representatives  who may include consultants, unions and members who club together where there are no unions.

I have not heard of anyone arguing that this is a problem yet, but I’m pretty sure that the savings organisations (mainly insurers and insurance broking consultants) will be facing problems in 2027 onwards when the Pension Schemes Act begins to bite and where CDC starts eating at their workplace schemes.