The Auto-Enrolment charges cap: The “unknown unknowns”

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A quote from American politician Donald Rumsfeld is often cited to expand on business complexities.  For those (very few) people who are still not familiar with the quote, below is the full text:

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”

We will return to the above quote (and particularly the unknown unknowns) later in this post  – as it has real resonance in the area of pensions Auto-Enrolment compliance, and the recently announced changes in this area.

As most followers of this blog will be aware that the Government’s response to the “Better workplace pensions” Consultation announced some key minimum requirements for all Defined Contribution schemes being used by employers to meet the new Auto-Enrolment duties.

Broadly, the key changes in the area of charges and remuneration can be summed up as follows:

  • A maximum charges cap of 0.75% per annum for the default fund of schemes being used for Auto-Enrolment
  • A ban on all forms of commission arising from schemes being used for Auto-Enrolment

For those requiring the more exact details and timetable of these changes, I would refer you to our technical bulletin published earlier this month which can be viewed here:

It is self-evident that these new standards, arriving as they do right in the middle of the Auto-Enrolment staging-date program, would create some problems for both those UK employers who have already complied with the legislation, and many more that are about to do so in the next few months.  What was less evident, even from reading the Impact Assessment provided alongside the above announcement, was how many employers would be facing a new and unplanned for problem here.

Knowing that this was likely to be the case once the Government’s response was finally made, we sought to get some idea of the scale of the problem at our recent Jelf Employment Seminar in London (February).

The two key questions are as follows:

What is the Annual Management Charge (AMC) in your main company pension scheme?

  • 0.5% or less:  13.22%
  • Between 0.5% and 0.75%:  20.66%
  • Between 0.75% and 1%:  19.83%
  • More than 1%:  5.79%
  • Don’t know:  28.10 %
  • Don’t yet have a pension scheme:  12.40%

What method do you currently use to remunerate your pension consultant/ advisers?

  • Commission only:  26.45%
  • Fee only:  28.93%
  • A combination of fee & commission:  10.74%
  • Don’t know:  16.53%
  • Do not have a pension consultant:  17.36%

Clearly, those employers who have pension scheme charges above 0.75% per annum and/or commission inherent in their offerings will have to take some action to comply with the new rules within the timetable allowed.  For more of my thoughts on this area, please see some of the press coverage from last week (a couple of examples can be seen here: and here for those interested). 

So what more is there to say here?  To return to Rumsfeld’s quote, it’s the “unknown unknowns” that strike me as the real problem.  Let me expand…

Any employer that is able to answer both the above two questions with a degree of certainty is also likely to be aware of the new rules and will be able to quantify if they have a problem relatively easily.  It is only a short step (although possibly time consuming and expensive) to then plan and take action promptly to comply with the new edicts. 

Those employer’s that answered “don’t know” to either question may be less engaged with their pension offering, and therefore may face a greater challenge in assessing the extent of the problem before any corrective action can be considered.

But there is a third grouping – and one that does not feature in the above data.  This last group equates rather well with the “unknown unknowns” of the Rumsfeld quote above.

I would suggest that those employers who are so disengaged with their benefits offering that they do not attend seminars and workshops on benefit issues, and do not read updates on the topic either, are the most likely grouping to be exposed to breeching the above minimum standards.  And given that this grouping does not actively engage with the employee benefits community, it does raise the question as to how they will become aware of the need to take further action? 

It’s difficult to say at this point.  I suspect that a lot will depend on the stance that the pension providers take when it comes to communicating both the legislation edicts, and their response to these challenges.  But even then, the onus may be on those disengaged employers to both hear the message, and take some action.

Only time will tell if this turns into the problem that it could become, and if so, what stance the Pension Regulator will take here.  In the meantime, if you are aware of organisations that might fit the “unknown unknowns” grouping, then now might be a good time to give them a nudge in the direction of advice and guidance on these important changes.

Best regards


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About the author

Steve Herbert is an award-winning thought leader on Pensions and Employee Benefit issues. His principal aim is better communicating the value and usage of employee benefits to employers. This he has achieved through many (highly successful) seminar series over the last decade, and his regular and widely read blog posts on the subject.
He also acts as a judge in HR and Employee Benefits industry awards, article writer, and product innovator. Steve is a regular contributor to DWP forums and compulsive responder to formal Government Consultations on pension and employee benefit issues. He is occasionally accused of making employee benefits interesting.