Employers due to start auto-enrolment in April 2014 may have to take steps now to ensure they can hit a moving target on pension charges according to Towers Watson.
Will Aitken, senior consultant at Towers Watson, said: “Employers with staging dates in April or May 2014 have been told that their schemes will be subject to the cap straight away. However, the level of the cap and what it includes is not expected to become clear until early in the new year.
“Until then, these employers – roughly speaking, those with between 90 and 249 staff* - will be feeling their way in the dark.”
The consultation paper published by the Department for Work and Pensions includes options for capping charges at 0.75 per cent of funds under management and for a 1.0 per cent cap, but does not completely rule out setting the cap at a different level. It also asks what should be within the scope of the cap and discusses banning schemes with ‘Active Member Discounts’ (lower charges for current employees than for ex-employees), or which pay commission to advisers, from being used for automatic enrolment.
Will Aitken said: “Employers will be held responsible if they do not have a compliant scheme, so they are going to need to play it safe. If an employer was planning to enrol employers into an existing scheme with a 0.8 per cent charge, crossing its fingers and hoping that the Government allows this will leave them with a race against the clock if the decision goes the other way. Nor can employers take too much comfort from a headline charge that is slightly below 0.75 per cent until we know what counts towards the charges that are going to be capped.
“Many medium-sized firms will have negotiated charges that are low enough to leave them feeling reasonably confident. However, where charges look borderline or include active member discounts, firms should talk to their providers now and understand what would happen if the arrangements they have agreed fall foul of the new rules. For example, will the provider walk away and leave them to find a new scheme from scratch or charge the employer separately for any add-on services it supplies?
“Unfortunately for affected employers, they may have to compete for providers’ attention. Providers will simultaneously be quoting for smaller employers’ business and chewing over how they would re-price the 100,000 or so existing schemes which pay commission and/or apply active member discounts if these arrangements are outlawed.
“Pension charges is an issue that has been simmering for a long time. Those firms standing in the worst possible place when it boiled over are going to have to act quickly to clear up the mess it has made of their automatic enrolment plans.”
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