Editorial: On the threshing floor

A 0.75 per cent charge cap on pension schemes used for auto-enrolment is the most courageous. The most wimpy is a 1 per cent cap.

The government is looking for feedback about what this charge should contain – whether it is simply the annual management charge, or whether it aims to cover more costs by looking at a total expense ratio or other calculation.

Others have questioned why the government has come out with charge levels before deciding what it was capping, but it is hard to see how either element could have been omitted.

The modelling in the consultation uses the AMC. Indeed, as L&G’s Adrian Boulding has pointed out, it also modelled the impact of a 0.5 per cent AMC on an individual saving for 46 years.

Such a saver would lose 13 per cent of their pot to charges, while a 1 per cent AMC would mean a loss of 24 per cent of their retirement savings.

Then, in its wording of the three options, the document explicitly says 1 per cent would reflect the stakeholder cap, which was also based on AMC.

What are we to make of these clues? Will the government choke at the final moment and settle for the one set lowest? Or will it roll on with a more comprehensive cap that is low enough to have some bite?

The consultation also talks about widening the disclosure requirements set out in the Pensions Scheme Act 1993 to ensure “consistent disclosure of costs and charges” by scheme managers and trustees, and in a mandatory, standardised format.

It is too easy an answer to say transparency is the more important issue. The fact that the majority of people will not read what has been disclosed to them supports the need for protection against excessive charge levels.

The strength and success of the charge cap – as a tool to mend this market for the consumer – will be key to judging the legacy of our current pensions minister. Go big or go home.

Ian Smith is editor of Pensions Week. You can follow him on Twitter @iankmsmith and the team @pensionsweek.