No cap on workplace pension scheme charges before 2015, Pensions Minister confirms

Out-Law News | 24 Jan 2014 | 9:46 am | 3 min. read

The Government's proposed cap on annual management charges (AMCs) levied by workplace pension schemes used for automatic enrolment will not be introduced before April 2015, the Pensions Minister has confirmed.

In a statement to Parliament Steve Webb said that the Government remained "committed to tackling high charges in workplace pension schemes", but that responses to its recent consultation on the changes had indicated that the cap was being introduced too quickly.

"We remain strongly minded to cap pension scheme charges in the default funds used for automatic enrolment," Webb said in his statement. "However, we have consistently encouraged firms to start getting ready for automatic enrolment 12 months ahead of the time the new employer duties apply to them. Therefore, to give those employers at least 12 months notice of the rules that will apply to them; I can confirm that any cap on charges will not be introduced before April 2015."

The announcement was widely expected following press reports last week.

The Government set out its proposals for capping AMCs on pension schemes used for automatic enrolment in October. It included three proposals for a charge cap: 0.75% or 1% in all cases, the latter reflecting the cap that applies to charges on stakeholder schemes; or a standard cap of 0.75% which could be increased to 1% if the employer could justify the need for higher charges to the Pensions Regulator. The cap as proposed would have initially applied to employers who started auto-enrolment from April 2014; and would then have been extended to those who started auto-enrolment earlier.

The plans have been championed by Webb despite opposition from parts of the pensions industry, as well as the Office of Fair Trading (OFT) in its own investigation into the defined contribution (DC) pensions market. In its final report, the consumer protection regulator decided against recommending the introduction of a cap on scheme charges for a number of reasons, including the "unintended consequences" of setting a cap too high or too low. It has instead ordered an audit of older schemes and those with higher charges by the Association of British Insurers.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement showed that the Government had "realised the importance of timing" in setting a cap.

"A very large number of small and medium-sized businesses have already reached decisions about the schemes they are due to set up this year," he said. "If the Government had imposed a cap this April, some of their plans would be thrown into disarray. That sort of disruption would not have helped to ensure a successful start to auto-enrolment for those businesses."

"And setting a cap at the right level is tricky. If the cap is too high, pension savers won't be protected - and actual experience or fear of high charges can put savers off pensions for life. But a low cap risks forcing providers to cut back on quality of service and superior investment performance, which come at a price. There is still plenty of work to be done to work out what an appropriate cap should be," he said.

Meanwhile, the Financial Times has claimed that the Government is also investigating ways to tackle the poor value annuity deals offered to those with small pension pots on retirement. Webb told the paper that this was something that he was looking at after it published analysis showing that those with less than £10,000 saved in a pension were offered very low rates when purchasing an annuity, meaning that they had little chance of living long enough to recoup their initial investment.

"The problem here is that the administration costs involved in dealing with small pots may not be any less than those for larger pots," pensions expert Simon Tyler said. "Offering better value to those with small pots could come at a cost – to be met by those with larger pots - and increasing the cost of annuities for those with larger pots won't help the Government in its aim to encourage more pensions saving."

"This is quite a conundrum. Solutions might include the Government itself providing small annuities, or steps to encourage more competition in the small annuities market. There is likely now to be considerable debate about what is feasible and cost effective," he said.