Analysis: Experts have raised questions about a possible cap on drawdown charges proposed by Ed Miliband last week, as the industry braces itself for the reforms and an uncertain general election outcome.
Providers of auto-enrolment default funds have been gearing up for the 0.75 per cent cap on annual management charges due to come into effect in April, which resulted from a wider industry drive to raise standards and improve member outcomes.
The Labour leader mooted the idea of extending similar consumer safeguards to the post-retirement world at an event in Redcar on Friday, but did not stipulate a cap level for drawdown products.
Industry figures have questioned the motivation behind the promise and possible methods for capping fees.
Alan Higham, retirement director at provider Fidelity, said capping charges could be a way of blunting the potential risks of the pension reforms without overtly opposing them.
“If [drawdown] is not economical people won’t offer it. If they don’t offer it you can’t do it… it could be a very good way of rolling back some pension freedom if fundamentally you think it’s a bad idea,” he said, noting there were no plans to cap charges on annuities.
If drawdown is not economical people won’t offer it. If they don’t offer it you can’t do it… it could be a very good way of rolling back some pension freedom if fundamentally you think it’s a bad idea
Alan Higham, Fidelity
He added that the proliferation of new products coming in to the market ahead of the Budget reforms may already be pushing down prices.
“While there is strong evidence to suggest competition is driving costs down, isn’t it better to wait and see?,” he said.
In addition, consumer advocacy group Which? last week launched a campaign calling for a government-backed drawdown scheme after a survey by the group indicated a 50-basis-point charge cap on drawdown could save retirees more than £10,000 on a £36,000 pension pot, when compared with a higher-end 275bp arrangement.
The report stated: "The government should work with the FCA [Financial Conduct Authority] to introduce a charge cap for default (internally sold) drawdown products. This should include both investment and platform fees."
However, Daniel Taylor, head of administration services at consultancy Premier, said many trustees would not be willing to offer drawdown in-house, even if the cost of doing so was capped.
"In most trustees' minds everything is geared up to provide a pension at a specific date," he said. "I think trustees are hesitant around decumulation."
He added: "Even if the cost came down, most trustees will say the life offices still have more experience and are better suited to be providing it."
Devil in the detail
Arron Slocombe, partner at law firm Baker & McKenzie, said the “devil will be in the detail” of the proposal, as the wider drawdown market is expected to change drastically in the coming months.
He said it could help control costs if drawdown becomes a common default option for defined contribution savers.
“It depends on how widely this cap is applied. If it was applied across the board that might well stifle the market and prevent the sort of innovative products the coalition government would like to see,” he said.
He added: “If it’s a cap on all those situations where people are defaulted into it, that would be a much less drastic matter for the market, then people might suggest it’s a natural progression to look at these things. Most of the market has been focused on the build-up phase.”
Claire Trott, head of technical support at administrator and self-invested personal pension provider Talbot and Muir, said the administration of a drawdown arrangement did not differ greatly between pots of different sizes, making a flat-fee charge fairer and easier for customers to understand.
“People can understand pounds and pence... If you [pay] less for a pot of £30,000, then you’re being subsidised by pots of £100,000."
