Towers Watson lists 10 ‘don’t knows’ about how the proposed pension charges cap will work and the impact it will have.
We don’t know:
1) whether the charge cap could be below 0.75 per cent - either from Day One or soon afterwards. The consultation paper does not rule this out or explain why a lower cap was not proposed. The Pensions Minister has since said that a lower cap could reduce providers’ readiness to serve SMEs but that the cap could be reduced in future.
2) if there is any chance whatsoever of the Government not capping charges? The consultation paper asks about alternatives to a charge cap. When asked for his views on the charge cap proposal the Pensions Regulator’s executive director for DC recently said: “I am not just interested in costs and charges…Value for money is not just about low cost” and that “high charges” could be “good value for money”. However, the Prime Minister has already said on Twitter that ‘We’re capping pension charges’.
3) how providers will re-price tens of thousands of schemes whilst also taking on new employers.
4) how much business the cap will drive to NEST.
5) how providers will equalise charges for active and deferred members if Active Member Discounts are banned – and how employees will react to charges going up.
6) what the cap will be for providers such as NEST who do not charge a simple percentage of the member’s fund. NEST’s charges would be higher than a 0.75 per cent or 1 per cent cap for some older employees. The consultation paper talks about members paying broadly equivalent charges over the ‘lifetime of their saving’. This might hint that the comparison will be based on younger members.
7) how providers will reflect a commission-free future where commission has already been paid.
8) what charges the cap will actually include. Some employers who may think their charge is below 0.75 per cent could find it is above the cap when the Government’s definition of charges is unveiled.
9) in schemes whose charges will be below the cap in any case, will charges rise because of providers having to set aside extra capital?
10) the impact on the future of DC investments, including use of active management and diversification. The Defined Ambition paper raised the possibility of exempting schemes with guarantees from the cap but guarantees are not the only way to reduce risk.
Will Aitken, senior consultant at Towers Watson, said: “The industry has been waiting for guidance around pension charges for some time. Even now that the consultation paper is out in the open, it is not clear exactly what the Government intends and the proposals raise further questions about how providers will respond. Given that the cap is proposed to take effect from April 2014 for some employers, they can’t afford the luxury of waiting for answers to all these questions to emerge. We’d recommend that they start asking questions of their advisers and providers straight away. If an employer’s scheme isn’t compliant, it’s the employer that could get fined.”
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