7th November 2013
Legal & General has added its voice to calls for workplace pensions to be capped at a 0.5% annual management charge. As we reported earlier this week, Which? is on the warpath against high charges and is calling for what amounts to a universal cap of 0.5% in its Handsoffmypension campaign.
Other experts, particularly from employee benefit and financial advice firms have warned that by changing the rules in the middle of the reform, employers could fall foul of the rules and employees may lose interest in paying into a pension.
However the support of a big pension firm such as Legal & General is significant. It provides a lot of the new workplace pensions including for many FTSE 100 firms. The 0.5% figure is lower than the Government proposal which would cap charges at either 0.75%, between 0.75% and 1% or at 1%. L&G says a 0.5% cap should apply to all auto-enrolled default funds. Which? would go further and says it wants all pensions included.
This is the statement from L&G group chief executive Nigel Wilson (pictured).
“We have capped auto enrolment charges at 50bps – and we believe nobody saving for a workplace pension in standard default funds should have to pay more than this. The Government’s proposed 75bps cap needs to be strengthened in our opinion: reducing it to 50bps could benefit pension savers by tens of thousands of pounds over a working lifetime.”
Other chief executives of other insurance and pension firms do not agree and indeed says it suits the industry. The case put by Royal London (which incidentally is mutually owned) is the insurers’ owners are the ones that will really benefit because as more and more funds are built up, 0.5% starts to look more and more generous.
Phil Loney, Group Chief Executive of Royal London said today in respect of the proposed pension charge cap says: “Shareholders will be the only winners through the introduction of price controls. The price cap will rapidly become the floor. Our research strongly demonstrates that charges on Workplace Pensions will fall much further if left to a competitive market (a fall of as much as 40%), so introducing a cap now will trap costs at today’s levels. Shareholders in the plc must be raising a toast to the Pensions Minister as he has underwritten their returns for some time to come. The losers will be members of schemes whose pensions will not benefit from the anticipated fall in charges that we anticipate in a free market. The other losers are smaller employers who will be forced to pay set up charges outside the capped annual management charge.”
L&G have come up with a practical way of implementing a cap. Its long standing pensions expert Adrian Boulding says: “There are plenty of additional services that some people will find worth paying more for. Wider investment choice, financial advice, auto-escalation programmes are all things that members could choose to pay more for. But the basic pension that everybody is defaulted into by their employer should cost no more than half a per cent.”
“There are two ways forward. The Pensions Minister could use his statutory powers to impose a cap equivalent to 0.5% a year. Or, the Pensions Regulator could let it be known that employers who choose to auto-enrol people into schemes with higher charges than the State provider NEST levies are exposing themselves to challenge that they have disadvantaged their staff. The open ended threat of future regulatory action may be just as effective as a statutory price cap.”
There is some nuance here in that those scheme members who want to pay more for more sophisticated fund management can do so by opting for something other than the default fund. The reality is that not a lot of people choose to do so. Actually choose may be the wrong word. Effectively they don’t choose to do anything else so their money goes into the default fund.
Think about whether you want to be in default fund
At Mindful Money, we recommend you – as a hopefully informed investor – give it more thought that simply accepting this. Another fund and another investment strategy strategy may be better suited to your goals.
Mr Boulding has also suggested that people may want to pay for additional advice. Once again, this is an interesting issue. Prior to all these reforms, which are currently stripping out commission and consultancy charging from pensions, you might have received advice or at least substantial workforce communications which could have included workshops. Ultimately the money for this was probably coming out of the pension in some way.
Yet many advisers would argue that this meant they could make the case for a better investment strategy and let them warn employees that doing the minimum (eventually 8% of salary) would probably not see them funding their retirement goals adequately. That advice won’t happen now unless the employer pays for it, or individuals take individual advice – which is, once again, expensive.
All these developments suggest that the direction of travel for charges on pensions is definitely down. You are unlikely to be overcharged in future and that must be good news for investors. It is less good news for employers.
Employers may break rules inadvertently
Hundreds of thousands of small employers are due to take part in the new pension scheme very soon. This is known as the staging date. The fact the rules keep shifting gives them an additional headache. Their scheme may not meet the new requirements and have to change.
And although L&G sounds enthusiastic, some other providers may decide auto-enrolment is simply not profitable enough for them with a low charge cap or at least not profitable for them to offer schemes to any but the larger employers.
There could be a lot of disruption and employers may have to change direction swiftly.
Employee benefits firm Jelf’s Steve Herbert argues is his excellent blog that all this change and debate makes it much more likely that employers will fail to comply with all the rules. Some may have to change schemes that have already been set up. Mr Herbert questions the wisdom of bringing in a price cap now. A lot of disruption could also see more people opting out which is surely the worst result of the lot.
Prior to this price cap initiative Mindful Money interviewed another workplace pension expert Philip Smith from Buck Consultants about the challenges facing smaller employers which may well be worth a watch if you are such an employer.
At the different end of the pension process, Mindful Money ran a viewpoint from retirement advice expert Nick Flynn who points out there where employers pay for annuity advice for their staff the outcome is much better, because they receive a better pension.