Out-Law / Your Daily Need-To-Know

Out-Law News 2 min. read

Pension scheme consultancy charges to be banned in first stage of Government crackdown


Consultancy charges are to be banned for pension schemes used in auto-enrolment, the Government has announced, in the first of a number of actions it plans to take to tackle "high and inappropriate" pension charges.

In a written ministerial statement (2-page / 10KB PDF), Pensions Minister Steve Webb said that regulations to ban the practice would be published "as soon as possible".

The Department for Work and Pensions (DWP) will also consult this autumn on proposals to cap default fund charges in defined contribution (DC) pension schemes. Measures allowing it to do so have been included in the new Pensions Bill, which has just been published.

"With millions of people taking up pension saving for the first time under automatic enrolment, we have to give people confidence that they will get good value for money," Webb said.

"That is why we are banning consultancy charges, where scheme members end up paying for advice given to their employer. In addition, the OFT is investigating the whole workplace pensions market and we will act promptly and vigorously later this year in the light of their findings," he said.

Consultancy charging allows advisers to deduct a fee directly from the pension pots of employees to pay for advice given to the employer. It was introduced as a result of the Retail Distribution Review (RDR), which ended commission payments to financial advisers. A Government review has since concluded that these charges can have a "disproportionately negative impact" on people who change jobs regularly, and that the measures in place to prevent advisers from deducting high charges from employees' pension pots are inadequate.

However, pensions law expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, warned that the ban could discourage some employers from seeking advice.

"This increases the risk that employers will fail to obtain the best deal for their employees," he said.

"Presumably, the DWP believes that employers are prepared to pay for advice, or that advice isn't needed. The OFT's ongoing market study covers the very issue of whether employers are prepared to pay for help, so it is strange that the DWP didn't wait for the answer from the OFT," he said.

"If the DWP thinks that capping pensions charges removes the need for advice, they are wrong. A good pension is about more than just low charges - what about investment performance?" he said.

Pensions law expert Simon Tyler of Pinsent Masons added that the proposed introduction of a cap on charges on default funds, where a pension scheme member's money is automatically invested if they do not choose another investment option, would come as "no great surprise".

"A charges cap applied to stakeholder pensions, even though employees weren't auto-enrolled into them," he said. "It is somewhat odd that there should have been no such cap for auto-enrolment schemes initially."

"The impact of the cap will depend on the definition of charges, and the level of the cap. If the cap is too low, it may reduce competition among providers. Higher than average charges aren't necessarily a bad thing - good governance and strong investment performance are worth paying for," he said.

The proposal for a cap on charges follows the work of consumer protection regulator the Office of Fair Trading (OFT), which is conducting a market study to examine whether DC workplace pension schemes provide the best value for money to savers. It is due to report back by August 2013. Among the aspects of the market being investigated by the OFT are whether there is sufficient pressure on pension providers to keep charges low, and what information is made available to savers about charges.

The Pensions Bill also sets out the Government's plans for a flat-rate state pension, set above the level of the basic means test, which is due to begin in April 2016. If passed in its current form, it will bring forward the increase in the state pension age (SPA) to 67 to 2026-28 and introduce a framework for regular reviews of the SPA. The Bill also includes provisions to introduce automatic transfers for small pension pots, and introduces a new statutory objective for the Pensions Regulator to "minimise any adverse impact on the sustainable growth of an employer".

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.