18th November 2013 by The Harried House Hunter
The Department for Work and Pensions is asking for views about its consultation on workplace pensions. The big issue is the charge cap which it proposes to set at either 0.75% or 1% of the annual management charge or between the two. We have put the press release in italics below.
The consultation so far has received support from consumer and trade organisations alike but the Government wants to make sure that those who pay into pensions get their chance to put forward their views.
By 2018 up to 11 million people will be eligible to be automatically placed into a pension by their employer and those schemes should give savers good value for money. The consultation looks at options for a cap on pension charges. Even small differences in the annual management charge can lead to a significant change in retirement pot.
Minister for Pensions Steve Webb said: “We need to make sure that people can be confident that their hard earned savings are not being whittled away by unreasonably high charges. Our proposals for capping charges and increasing transparency are aimed at making the system fairer. It is in everybody’s interest that we get this right so I am asking people to get involved in our consultation”.
Options for the cap include a:
higher charge cap of 1% of funds under management
lower charge cap of 0.75% of funds under management
two-tier ‘comply or explain’ cap – a standard cap of 0.75% of funds under management for all qualifying schemes and a higher cap of 1% available to employers who report to the Pensions Regulator why the scheme charges in excess of 0.75%.
On one level such an invitation should surely be applauded. It is about time the public was asked its views about pensions.
Yet on another level, it may be the lobbying equivalent of asking the diners in a restaurant to pay what they think a meal is worth. Great for getting people’s attention but not necessarily brilliant as a long term proposition.
At Mindful Money, we suspect that the answer for most investors, savers, scheme members – call them what you will – when offered a cut in charges would be to say “yes, of course”.
That may miss a few significant points however. The first is that a cap of 0.75 per cent means there really is only a limited amount of fund management expertise you can deliver at this price level. In our view, that is doubly the case if you are with a smaller employer because the unit costs are a lot higher.
Now you may be relaxed about this, but it is something to bear in mind. Also worth considering is that at such level of charges, your employer is more likely to place your workplace pension with the state-backed Nest scheme possibly because no other provider will take the business. The good thing about Nest is that it must take all business.
Further good news is that Nest’s annual management charge is 0.3%, but it also levies an upfront contribution charge of 1.8%. Nest hasn’t given a date for when this charge will stop being levied, so you might have an uncertain charging structure going forward.
For older scheme members, who don’t place a lifetime of earnings with Nest, this could take charges above the suggested cap. It is not mentioned in the DWP release.
But because it is seen as temporary, it isn’t likely to count for the purposes of any cap. So when you ask for lower charges and you are in your 50s, you could be getting higher ones.
Also if you are in an older contract, of at least more than 12 years old, you may be paying much more than 1%. There is some evidence of charges as high as 2.3% and the DWP wants to do something about this. What isn’t clear is whether there is anything the Government can do about this. With average charges for new workplace pensions well below 1% perhaps the Government ought to be spending its time navigating old contract law to see if these charges on these old can be lowered practically.
By contrast, we are not so sure it is a pressing need for new schemes given that the Office of Fair Trading found that charges were actually at 0.51%.
Finally, the whole direction of Government policy has to all intents and purposes to strip financial advice from the pension process – certainly when it comes to advice for individuals. So there is no commission for encouraging more members, and the charging method that replaced commission, known as consultancy charging is also facing a ban.
Some experts suggests that with smaller schemes, the only communications that can be afforded will be those provided by the Government, Nest or a limited amount of information from other providers unless an employer decides to fork out for it.
That probably risks more people opting out of the workplace pension system and also continuing with the minimum 8% which may not be sufficient.
Last week, we saw a useful piece of research from pension firm Aegon which looked at young peoples’ attitude to pensions.
The Aegon report asked young people in 12 countries what would make them save more and found 26% saying ‘better and more frequent information about my retirement savings’ would encourage them to save more for retirement, 23% citing ‘access to a professional advisor with personal recommendations,’ and 22% wanting ‘financial education so I am more aware of what I need to do for myself.
We are not sure how that squares with a system that will have little regulated advice or more general communications.
There is no reason to get starry eyed about how brilliant fund managers, insurers and advisers are. Some fund managers overcharge and take advantage of inertia to continue doing so, some insurers, particularly closed insurers have trapped consumers’ money in overcharging funds, some advisers have set up arrangements particularly around active member discounts that have seriously penalised former employers with charges creeping well above 1%.
Yet in modern workplace pensions such behaviour seems to be in the minority of cases illustrated by the low level of charges on new schemes. It is terrible if you are affected by what amount to price gouging charges, but many people these days are not. Now back to this consultation.
If you just want your money invested at a low level of charging and in a reasonably low risk way, then you should probably answer this consultation (if you can be bothered) to say you want charges brought down (especially if your charges are above 0.75%). Even, if you want more sophisticated investment, you may have the option to choose other than the default fund and invest in something else at a higher charge.
But if from a societal point of view, if you are trying to maximise contributions from employees, get them to engage with their pension, and indeed encourage a wider understanding that taking some risk early on in life may be a sensible thing to do, you might say a really tight charge cap isn’t the sensible place to start.
Our suggestion might be to weed out the extreme examples of over-charging, cap the default at a reasonable level certainly lower than 1%, but leave some room for employers and their advisers to encourage more saving.
It is tricky however. In many ways, we are asking individuals to pay for advice that might then convince them to save more. That’s not an easy sell.
But with this consultation, we fear the Government is asking an overly simple question to get an oversimplified answer which also happens to be the one it wants.