Out-Law News 3 min. read

Government to press ahead with pension charge cap consultation despite OFT warnings


The Government will shortly publish a consultation on capping charges under pension schemes, despite warnings of the "unintended consequences" by the Office of Fair Trading (OFT).

Pensions minister Steve Webb told the Financial Times that a cap may be needed in certain circumstances, despite the "risks" of the policy change.

"I understand the reluctance but a lot of people want clarity and some sort of safeguard," he told the newspaper. "This raises some searching questions about what we should cap. There is a challenge there but it is a challenge we will have to meet."

By contrast, the OFT decided against recommending a cap on charges as part of its DC pensions market study, which was published yesterday.  Instead, the consumer protection regulator reached an agreement with the Association of British Insurers (ABI), which will carry out an immediate independent audit of all workplace pension schemes sold before 2001, and all those sold after that date with an annual management charge (AMC) higher than 1%.

The OFT concluded that some scheme members were not getting value for money from their pensions at the end of its six month study of the DC market. DC pensions are those where the benefits provided on retirement depend on the performance of the saver's investment. Members of older, high charging contract and bundled trust schemes were subject to an AMC on average 26% higher than those of newer schemes, according to the OFT; while those on smaller, trust-based schemes could also be losing out due to low levels of trustee engagement and capability.

Although many in the industry had anticipated that the OFT would recommend the introduction of a cap on charges, its report concluded that an industry-led audit process would be more effective than a cap. In some cases legacy schemes offered value for money benefits such as guaranteed annuity rates alongside higher charges, it said; while it would be difficult to capture the many different types of charge within one cap. Of more general concern was the risk that a cap could create the risk of "unintended consequences", the OFT said.

"Set too high, a cap can become a target for providers. Set too low, a cap can create incentives for providers to lower quality and/or impose charges elsewhere," it said in its report.

"While we would not rule out a charge cap, it should be considered in full knowledge of the different charges and benefits that apply in the market and of the risks that a cap might entail. We consider that the audit of scheme charges might be a helpful part of that process," it said.

"It will have come as a surprise to many that the OFT stopped short of recommending a cap on pensions charges – after all, stakeholder pension schemes were subject to a cap," said pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com.

"The OFT has given cogent reasons against a cap, pointing out the potential unintended consequences - but, politically, there is too much at stake. Lobbying groups and the media have successfully focussed attention on the problem of high charges. Actual experience or fear of high charges can put savers off pensions for life, while a cap on charges can boost confidence and contribute to the success of auto-enrolment," he said.

Although devising a "sensible cap" that avoided the problems identified by the OFT would be "no easy matter", Tyler said that the Pensions Minister's "continued drive" for a cap was "understandable".

According to the ABI, the older schemes identified by the OFT as potentially not being good value for money accounted for only around 10% of the nearly £300 billion assets under management by the pensions industry, and included closed schemes and those that would not be used for automatic enrolment. Otto Thoresen, the ABI's director general, said that the audit agreed with the industry would "ensure any problems can be sorted out".

"The impact of new technology, stakeholder pensions and auto-enrolment have combined to drive prices down consistently over the last decade," he said. "Pension charges are lower, more transparent and more understandable than ever before. This is good news for people saving into a pension. But it is important to remember that the level of contribution and how long someone works remain the most important factors in determining an individual's overall retirement income."

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