The debate about the proposed charging cap came to a head last week as the government’s consultation on the changes closed.
The response has been less than welcoming with some arguing the cap should be set lower than the proposed 0.75 per cent and others saying value for money should be the primary consideration. However, the majority of industry pundits have said value needs to be improved for many schemes.
At the end of October, the government issued a consultation that included three options for a cap on schemes used for auto-enrolment:
A charge cap of 1 per cent of members’ funds
A cap of 0.75 per cent “reflecting the charging levels already being achieved by many schemes”
A two-tier cap including both levels, allowing 1 per cent for those that can demonstrate value
However, pensions minister Steve Webb last week told the FT he has not ruled out a more aggressive cap. In a Q&A hosted by FT.com, he said: “Clearly, if we had an overwhelming response for something different, we would look at that.”
Pensions provider Legal & General waded into the debate, arguing the 0.75 per cent cap on management fees was too high and would have little impact on legacy scheme pension savers.
Meanwhile, financial institution Royal London said shareholders will be the only winners through the introduction of price controls. “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 per cent – so introducing a cap now will trap costs at today’s levels,” said group chief executive Phil Loney.
There are worries a charge cap could start a race to the bottom. Barnett Waddingham’s Malcolm McLean said the government should be careful not to impose a cap that severely restricts innovation.
And therein lies the rub: will a charge cap restrict innovation and stifle competition, or will it help the market flourish?
This is a pivotal point that could change the overall defined contribution landscape, with huge consequences for member outcomes.
Lisa Botter is deputy editor of Pensions Week. You can follow her on Twitter @l_botter and the team @pensionsweek.
