So we finally have a formal response to the Department of Work and Pensions (DWP’s) “Better workplace pensions” Consultation.
I have been slogging my way through the full response, with an eye on those parts that are likely to be most immediately relevant to employers, and particularly those seeking to comply with Auto-Enrolment duties.
So with that in mind, my current summary (which I will doubtless expand on in future posts) looks something like this:
- Charges cap:
A charges cap of 0.75% per annum for the default funds of all qualifying schemes will take place from April 2015. This cap excludes any transaction costs at this stage.
Unlike the original proposals, this date will apply to both existing qualifying schemes, and those that are yet to be set up. So employers that have already enrolled workers into a scheme may need to revisit that decision to ensure that the charges are below the new limitation by April next year.
It’s worth noting that the charge cap finally announced is the lowest of the three options set out in the Consultation. Yet the Government have, so far, resisted the calls for an even lower charge cap of 0.5% per annum. However, one ominous paragraph in the Consultation response includes the following words;
“While we share their ambition for low charges, moving to a lower default fund cap at this point would present a higher risk of unacceptable market disruption… however, this well be kept under consideration and the level of the cap will be examined in 2017.”
So it would appear that more changes may be ahead here.
Returning to the announced cap, it’s probably worth a note of explanation as to exactly where this cap will apply. It is clearly labelled as a “default fund” cap only. The Consultation response does recognise that some qualifying schemes that predate Auto Enrolment may not have a nominated default fund as such. So for clarity, the document adds:
“Where there is no specifically nominated default fund or strategy, our intention is that the cap should be applied to the fund which has the greatest number of members from each saving cohort”.
My final point on this section relates to schemes that have more than one charge (such as NEST with it’s two-charge structure). These schemes can still demonstrate that they pass the charging cap structure by comparing their costs against tables set out by the DWP in the Consultation response document. This is not something I have looked at in detail yet, and I may comment on this point further in later posts.
- Commission in Qualifying schemes:
Commission in qualifying schemes will be banned from April 2016. And from April 2015 any commission payments must not take the total scheme cost above the new default fund cap of 0.75% per annum.
Many employer’s are currently reliant on commission payments to support some, or all, of the pension scheme(s) consultancy services, so this will present an extra cost challenge to such organisations.
- Active Member Discount (AMD) charging structures:
The charging structure known as AMD, where higher charges are levied on those savers who have ceased contributing to a group pension scheme, will be banned in qualifying schemes from April 2016.
In addition, and more immediately, the default fund charges for both active and deferred members of qualifying schemes should both be below the 0.75% per annum default fund charge cap by April 2015.
- Consultancy Charging:
Consultancy Charging is a fairly recent charging structure whereby commission was directly deducted from early year’s contributions in the employees’ pension. This is to be banned from April 2015.
There is also a lot in the document on both Governance and Disclosure of charges, but I think this is less immediately important to employers struggling with Auto-Enrolment compliance than the charges element. I will comment further on these sections later this year.
So employers are now aware of the minimum pension scheme standards to comply with Auto-Enrolment legislation. For many organisations the above will require a change of plan, and in many cases renegotiation with the pension provider to ensure that the selected scheme(s) will comply with the new rules above. If you are in any doubt as to what actions to take, please speak to your usual Jelf Employee Benefits contact in the first instance.
Finally, and not least, it is worth mentioning that The Minister for Pensions statement yesterday was laced with emotive language. Phrases such as “an iron grip on pension charges” and “tighten it year by year” are perhaps a little concerning. It therefore seems likely that a 2017 review may bring further restrictions, and I certainly expect to see further developments on the possible inclusion of transaction costs within the charging cap at that time.
But I guess that the above announcements, and last week’s Budget changes, are more than enough change for most employers to be getting on with!