Auto-enrolment has been in place for more than a year now, but there is still work to be done, according to the government.
Auto-enrolment has been in place for more than a year now, but there is still work to be done, according to the government.
The Department for Work and Pensions (DWP) is consulting on introducing a cap for auto-enrolment pensions, which it suggests should be between 0.75 and 1 per cent.
This is not the first retrospective change to auto-enrolment legislation, with consultancy charging banned earlier this year after schemes had already been set up on such a basis.
A total of three options have been outlined by the DWP:
• A cap of 1 per cent of funds under management;
• A cap of 0.75 per cent of funds under management;
• A two-tier ‘comply or explain’ cap of 0.75 per cent as default or 1 per cent for employers who can justify the higher charge.
Setting aside the fact that this should probably have been addressed prior to the launch of auto-enrolment, there are several issues at play. Firstly, should there even be a cap?
“The key point here is that charges are only part of a larger and more complex picture,” said Ruth Whitehead of Ruth Whitehead Associates.
“Pensions must be competitively costed, but the cheapest option is rarely the best value for money. Stakeholder pension charges were capped, and the resulting products offered a small and mostly mediocre set of funds in which to invest, to the extent that I as an adviser felt unable to recommend them as good value.”
Also worth noting is that many schemes targeting the auto-enrolment market have already set up competitively-priced schemes – at least on the surface – although
it may transpire that such good deals are not available to the smaller companies yet to stage.
“The smaller employers with enrolment dates still to come may not find it so easy to get competitive charges and so you think these firms might benefit from the cap,” said Tom Dean, chartered financial planner at Plutus Wealth Management.
The consultation proposes eventually applying a cap to all schemes used for auto-enrolment, including existing older schemes enrolling newly eligible workers.
Older schemes are notoriously more expensive and repricing these to meet a cap could prove complex.
A further issue is what exactly a cap includes. Transaction costs are often quoted separately from an annual management charge, which can make the total costs far higher than the headline figure implies.
The consultation asks for views on whether transaction charges should be included in a cap to tackle this issue.
It also formally asks whether adviser commissions set up prior to the RDR should be banned in qualifying schemes.
