28th November 2013
Hargreaves Lansdown has warned that Government plans to price cap pensions will push big costs on to employers. It estimates that small employers will have to pay between an additional £4,000 and £14,000 at a cap of one per cent. One per cent is at the top of the range of costs being suggested by the Government in the consultation.
The firm is arguing that a cap of one per cent should be brought in 2017 when everyone has been enrolled.
The Government’s principle suggestion is for a charge cap at either 1% on scheme assets as an annual management charge, or a tougher cap at 0.75%. Legal & General and Which? are suggesting a cap of 0.5%.
Hargreaves Lansdown pension expert Tom McPhail says: “It is important to note that if you impose a price cap, you don’t make the costs disappear, you just push them somewhere else and it will be small businesses that have to pick up the bill. A price cap lower than 1% would cause hundreds of thousands of small businesses and entrepreneurs to have to pay additional costs towards the setting up of their workplace pension. At a conservative estimate, a price cap below 1% would mean every small employer would have to pay between £4,000 and £14,000 in additional administration costs for their pension scheme; it would be bad news for small employers struggling to turn a profit.’
“Whilst it is essential to ensure that scheme members all enjoy a good deal on their retirement savings, it is also important to be careful what you wish for. There is already healthy competition in pensions, with charges having fallen significantly over the past 12 years. It is absolutely vital to ensure that auto-enrolment is a success over the next 5 years and an over-zealous price cap could seriously jeopardise this vital process, which is intended to kick start the UK’s retirement savings.’
McPhail argues that the main concern with regard to high pension charges is the small legacy of schemes with charges in excess of 1%; new schemes today typically have charges of between 0.5% and 0.9%. At this level there is already very good value for investors.
HL has put together other arguments listed below.
Less than 3% of defined contribution pension scheme assets are in schemes charging more than 1%
A price cap lower than 1% would cause tens of thousands of employers to have to go back and redesign their pension arrangements again
A price cap lower than 1% would cause massive disruption, with nearly £50 billion of pension scheme assets having to be moved; all this disruption would incur additional costs
Over the course of 2014, 30,000 employers have to set up a workplace pension
Prices caps make almost no difference to employees in the early years of a pension when the fund values are low; they only really become relevant in 10 or 20 years’ time.
HL is proposing that the government look at introducing a price cap of 1%, delayed until the review of auto-enrolment in 2017 at the earliest.