Few people could get away with describing a consultation as a “full frontal assault”, but pensions minister Steve Webb gave it a go this week, and just about got away with it.
He was announcing the department for work and pensions’ latest proposals to introduce a cap on annual management charges on pension schemes used for auto-enrolment, which has predictably caused quite a stir across the industry.
Webb wants to cap charges at 0.75% to ensure that “every penny” people save for retirement “turns into as much pension as possible… The government believes that enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges.”
On the face of it, the government’s plans make total sense. Although a recent report by the Office of Fair Trading into defined contribution stopped short of calling for a one-size-fits-all cap, it said charges in parts of the pensions market were some of the worst it had ever encountered.
Even with the welcome introduction of auto-enrolment, a considerable number of people are going to be in for a shock when they finally realise just how inadequate that £120,000 pot they’ve managed to put away will actually be over the 25+ years of their retirement. With charges eating away at that year after year, they’ll be even worse off.
But as ever in this industry, things aren’t quite that simple. Setting the cap too low could result lead to significant unintended consequences. Providers could decide to exit the market, leaving the workers with even less choice.
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 preserve 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 passiveonly investments. 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.
Furthermore, the cap may become a standard charge, pushing costs up rather than reducing them.
The government is right in protecting the interests of people who need all the help they can get in building up a suitable pension and banish the outrageous charges which do exist out there, but they would do well to tread lightly if they wish to nurture the DC market to its full potential
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