Delays at the DWP

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17 Jan 2014

I couldn’t help but feel sorry for pensions minister Steve Webb this week after reports suggested his proposed cap on workplace pension charges will be delayed by a year to next April.

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I couldn’t help but feel sorry for pensions minister Steve Webb this week after reports suggested his proposed cap on workplace pension charges will be delayed by a year to next April.

I couldn’t help but feel sorry for pensions minister Steve Webb this week after reports suggested his proposed cap on workplace pension charges will be delayed by a year to next April.

Webb, who described his proposals as a “full frontal assault” on pension charges when he announced them in October, has gone from sounding like Shakespeare’s Henry V to Monty Python and the Holy Grail’s King Arthur, ordering his men to “run away!” when confronted by adversity.

Perhaps the comparison is a little unfair. Webb is one of the most able pensions ministers we’ve had in a long time and his unusual longevity in the role has helped give him a rare understanding of the problems faced by both savers and the industry serving them. Aiming to install the cap by April this year however, in order to coincide with the rollout of auto-enrolment to tens of thousands of small to medium sized employers in April, was always hugely optimistic and also rather naive, given the complexity involved.

Furthermore, the Department for Work and Pensions (DWP) was heavily criticised after its impact assessment on the proposals was given a “red card” rating by the independent Regulatory Policy Committee, effectively branding the evidence as “not fit for purpose”.

There have, of course, been a significant number of voices in support of Webb’s proposals. Some charges are set criminally high and a recent report by the Office of Fair Trading, while stopping short of calling for a one-size-fits-all cap, found charges in parts of the pensions market were some of the worst it had ever encountered.

And naturally, the opposition has made the most of the delay, questioning whether ministers had “caved in” to the “vested interests” of fund managers and pension companies and demanding that the government “explain why they are kicking ‘rip-off’ pension charges into the long grass”.

Meanwhile, the DWP’s explanation that, “this is an important and complex consultation which requires our proper consideration to ensure we get it right”, suggests the department was caught unawares by the strong industry reaction to the proposals – not just from ‘money-grabbing’ providers keen to protect their unreasonably high charges, but from those with genuine reasons why setting a 0.75% cap on charges could have real unintended consequences.

There has been an explosion of exciting innovation in recent years as the industry wakes up to the fact that DC is the long-term future of pension provision. Strategies and asset classes once the preserves of defined benefit funds are being re-worked to fit the needs of DC schemes. A blanket cap on charges could result in such projects being strangled at birth as low costs drive funds towards passive-only investments and active managers are forced to exit the market. Passive investing has its merits, but it is vital that DC is able to use a broad investment toolbox in order to deliver meaningful outcomes for members.

The delay will have come as a blow to Webb and critics will argue that the government is kicking the can and pandering to the City, but it is encouraging to see the DWP accepting that introducing the charges in their proposed form would have far-reaching and unforeseen consequence and perhaps demand further consideration.

Pensions are a long-term investment, so surely a year is a small price to pay for getting it right.

 

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