As per my post earlier today, the “Better workplace pensions: a consultation on charging” document was issued by the DWP just before lunchtime today.

I have had one initial read through this (as have some of my colleagues), and obviously we will need more time to fully absorb all of the 40-odd pages and the implications for employers, and particularly those in the midst of Auto-Enrolment (AE) preparation (which in line with the Pension Regulator (tPR) recommendations will be anyone within 12 months of their staging date). And even then, we must treat the document as an indicator rather than an edict - as this is only a consultation document and not yet a statement of confirmed intent by the DWP.

Yet there are some pointers in the document that are of immediate importance for employers, and that I think we are justified in highlighting some of these even at this early stage.

The main focus of the document, as the title suggests, is about the charging structures used in group pension schemes in the UK. The opening paragraph highlights that one year into the Auto-Enrolment timetable, 1.7 million people have been enrolled into a pension scheme, and (on average) around 90% of employees have remained enrolled after the 30 day opt-out window. So by pure inertia alone, many employees are now in a pension scheme, often without understanding the underlying charges involved. The document goes on to say;

“When small differences in charges can make a significant difference to final retirement incomes this is an area where we cannot afford to be complacent.”

It follows that levelling and controlling charges will be important for this population. And this is the main focus of this consultation.

Various proposals are outlined to help highlight and control costs, but perhaps none will be more challenging for employers than the proposal of a charges cap, certainly for schemes used for Auto-Enrolment, and possibly for other schemes also. The document sets out the following possibilities for a charging cap:

“We would value feedback on the following options for setting the level of a cap. It is possible that any final cap could lie somewhere between the two levels suggested, depending on the evidence received.

Option 1: A higher charge cap of 1 per cent of funds under management, reflecting the current stakeholder pension cap for certain scheme members.

Option 2: A lower charge cap of 0.75 per cent of funds under management, reflecting the charging levels already being achieved by many schemes.

Option 3: A two-tier ‘comply or explain’ cap. There would be a standard cap of 0.75 per cent of funds under management for all qualifying schemes. A higher cap of 1 per cent would be available to employers who reported to the Pensions Regulator why the scheme charges in excess of 0.75 per cent. “

Whichever of the above options is finally acceptable, the document suggests that this will apply for ALL employers who stage from April 2014 onwards. Those employers who have already staged, and may now find themselves in excess of the charges cap, are likely to have a “window” until April 2015 to rearrange their offering to fall in line with the proposed cap.

The lower the setting of the final cap, the more existing schemes will have to be unravelled to meet the new edict. This will create disturbance in the employer’s daily business patterns, increase the cost of the pension offering, and possibly create unease for employees also. And this ignores another issue. The pensions industry itself will be under a unique strain in 2014 - as the industry seeks to meet the challenge of tens of thousands of employers reaching staging date. Quite where the industry capacity to unravel schemes that were previously deemed acceptable will come from is anyone’s guess.

And that’s not all.

Three other actions are proposed:

• A ban on the “Active Member Discount” charging structure in Defined Contribution (DC) qualifying schemes
• The ban on Consultancy Charging should be extended from AE schemes to all qualifying DC schemes
• Adviser commission set up prior to the introduction of the Retail Distribution Review should be banned in qualifying schemes

Some of these proposals, and particularly the last one, are likely to be subject to quite a lot of industry lobbying, so we should not take these as certainties. Yet if any, or all, of these become fact, this will add even more confusion, and indeed a level of chaos, to the Auto-Enrolment landscape.

This all strikes me as somewhat bizarre. We have pretty much know that AE was on its way from as long ago as 2007, yet right now, smack in the middle of the final process, the various Government departments seem intent on creating a background noise that is disjointed and unnerving to all involved. Surely many of these changes could, indeed should, have waited until the initial AE project was completed? This continuing uncertainty will be of no benefit to those yet to be enrolled, or the employers that are seeking the best solution for their staff and their business model.

The only silver lining is that the consultation itself is a very short one, concluding on the 28th November. So I would hope that the outcomes of the consultation will be known by the end of 2013, so that all parties can plan a way forward for 2014 and beyond.

Best regards

Steve