What a week in pensions it has been. No sooner had the shock waves from George Osborne’s radical at-retirement shake-up in last week’s Budget swept through the annuity market, than Steve Webb steams in with a definitive 0.75% charge cap on auto-enrolment schemes from April next year.
By opting for what Webb termed “the toughest” of the government’s three mooted options for addressing charges, it seems the pensions minister has kept his promise of delivering a “full frontal assault” on charges. He has overlooked the other cap options in the consultation document – a comply-or-explain cap, allowing schemes to go up to 1%; or a simple 1% cap – in favour of an all out 0.75% across the board.
The charge cap has been fiercely debated by the industry ever since it was mooted in October last year. The consultation response saw a wave of backlash from those who argued the move was a blunt instrument that will stifle competition against those in favour who said it would improve member outcomes, deliver value for money as well as greater transparency.
The news is to be welcomed as a way of incentivising people to save and making sure pension pots receive the maximum feasible amount they can. According to the DWP, the move will see £200m transfer from the profits of providers to pension pots in the next 10 years. The improved transparency will also be a massive leap towards ensuring equality across the board and making sure providers and members are all reading from the same hymn sheet.
But what about the thousands of people currently trapped in the funds of older schemes with high and disguised charges? The Office of Fair Trading (OFT) has identified that charges are currently around one-quarter to one-third higher in schemes that were sold before 2001. The OFT’s independent audit of legacy and other high-cost schemes – scheduled to be completed by the end of this year – is a positive step on the path to addressing this issue, but more needs to be done to help these people move their funds without penalty and strong measures need to be in place to address this once the OFT’s findings have been analysed.
Another consideration is the risk that the market will just automatically assume the 0.75% figure is the benchmark. Most new schemes, including the National Employment Savings Trust (NEST), are already at or below that figure. NEST, for example, is 0.5% which many are already using as a benchmark and so the cap could potentially result in a scaling-up by some providers.
Elsewhere, delivering value for money is all well and good, but not if that compromises quality because introducing a cap also runs the risk of some DC investment strategies, like diversified growth funds, falling on the wrong side of the charge cap.
Last week people could say they didn’t want to save more in pensions because the charges were a rip-off and they would more than likely have to buy an annuity, but in a week all that has changed. Where previous governments have tended to this one has blown apart the market and bravely introduced well-intentioned reform over a short timescale – I just hope it hasn’t charged in too quickly.
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