As many followers of this blog will be aware, the recent consultation document issued by the Department of Work and Pensions (DWP) “Better workplace pensions: a consultation on charging†closed last week. We are now in the waiting period for a response to this consultation, the outcomes of which will shape the actions that many employers will have to take regarding Auto-Enrolment compliance in 2014 and beyond. And as mentioned previously, this may even create additional tasks for those employers that have already staged and complied with these duties as well. It’s therefore difficult to overstate the importance of the outcomes here.
So with this in mind, I would like to thank the delegates at our recent London event for their responses to our delegate voting questions. For those not present on the day, the combined results from the morning and afternoon sessions looked like this:
“Would you like to see further changes to Auto-Enrolment (and related pension) legislation put on hold until 2018?â€
Yes: 82.83%
No: 5.36%
Not sure: 11.82%
“Do you expect that you will have to review your AE pension scheme selection in light of the recent DWP consultation document?â€
Yes: 33.13%
No: 14.39%
No AE pension scheme selected yet: 25.55%
Don’t know: 26.94%
It’s useful to get an employer focused response to the consultation, and I managed to get these findings collated and across to the DWP before the closing date – so hopefully these will have some bearing in the final decision. So many thanks again to all those that contributed to the above results.
Yet some of you may still be feeling that any delay in imposing a charging cap will be putting savers at risk. And if you are such an individual, perhaps the below will encourage you to think again?
I have provided some example figures to the DWP which demonstrate that a delay in imposing a charging cap will have only a nominal detrimental impact on saver’s pensions. The principle reason for this is that most current-day pension schemes are set up on what is known as a “mono-charged†structure. Most charges under such schemes are taken late in the pension term, with the early years deductions being mostly small amounts. Given this, as long as a charging cap is imposed by (say) 2018, there will be little financial detriment to scheme members.
To illustrate this point (both to the DWP and our London audience) I crunched some figures based on a “typical†employee. Obviously, it’s hard to say what a typical employee’s profile would look like, given that workers from all walks of life and salary bands may now find themselves subject to pension scheme membership for the first time. So for this exercise I used the Office of National Statistics website’s national average salary figure of £24,596 per annum.*
And I then assumed that this individual’s contribution would be the full 8% of Qualifying Earnings as set out in the legislation.
So what is the difference in fund value in the early years between a pension scheme charged at 1% (the original Stakeholder charges cap, and also one of the possible charging caps as set out in DWP consultation document) and a charges cap of 0.5% (which some groups have been calling for, but is actually lower than the three options suggested by the DWP)?
The answer is very little.
Based on this example, there is a cash-loss** to the pension fund by the end of the 5th year of around £110. Sounds a lot, but if that were converted into a single life pension*** for a 65 year old in the 5th year of saving – this would amount to an estimated loss in pension terms of only £6.60 per annum, or only 12p per week.
So small beer by any standards. But the above example is probably someway higher than many employees will actually experience.
Many first time savers will be saving at a much lower level than the above 8% of Qualifying Earnings. The legislation allows contributions to phased-in over the period to 2018, with the starting level of contributions being only 2% of Qualifying Earnings. Based on a similar set of calculations, I estimate that such an individual is likely to lose only around 3p per week on the same basis.
Of course, for a saver further from retirement, the loss from the early years deductions will be compounded over time, but the point is that the loss in pension terms will still be small or nominal for the vast majority.
I have provided the DWP with details of the above as part of our consultation response, and hopefully these figures will bring a dose of reality to the debate.
So, and to reiterate my early posts on this point, there is really no need to impose the charges cap with such unseemly haste. As long as a cap is imposed by 2018, most pension scheme members will see only a minimal loss to their pension income. And the delay will allow employers, and their professional advisers, to concentrate on getting compliance with AE correct from outset. All parties can then work towards the charging cap with the luxury of a little more time.
We will have to wait and see if the above lobbying has been successful, but once again my thanks to those who contributed to the above findings.
Best regards
Steve
*ONS website 16/10/13
**all figures based on quotes kindly produced for this exercise by Scottish Widows (mono-charged basis)
***based on a 6% annuity rate for a male single life pension at age 65 (which is currently more generous than the market will offer)
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