Pension scheme consultancy charge ban could be extended to historical arrangements, says Government

Pensions Minister Steve Webb said that the Government would consult on the extension to the ban in the autumn, following the publication of a report on the defined contribution (DC) pensions market by consumer protection regulator the Office of Fair Trading (OFT). He was speaking as regulations preventing new consultancy charging arrangements on DC schemes used for automatic enrolment came into force.

"My job is to make sure people get better pensions," Webb said. "So when people put hard-earned cash into a pension I am determined to make sure it doesn't get gobbled up by charges. This ban will make the system fairer for anyone being automatically enrolled into a workplace pension."

The ban on consultancy charging was announced by the Government in May, following a review which concluded that the charges could have a disproportionately negative impact on people who change jobs regularly. The legislation will initially only apply to DC schemes qualifying for automatic enrolment, including new charging arrangements and those entered into after the ban was announced 10 May.

Consultancy charging allows financial 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.

Under the new regulations, a scheme providing money purchase benefits which contains a provision allowing amounts to be deducted from a scheme member's pension pot or contributions cannot be used for automatic enrolment if that amount is to be paid to a third party under a contract between the employer and the third party. Trustees and providers are excluded from the definition of 'third party'.

The proposal for a cap on charges follows the work of the 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 shortly. 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.

"For auto-enrolment to be a success the Government needs to ensure employees' contributions are not eaten up by charges," said pensions expert Matthew de Ferrars of Pinsent Masons, the law firm behind Out-Law.com. "The ban on consultancy charges is one step towards achieving this; steps taken to put a cap on charges following the publication of the OFT report in the Autumn will be another."

"Whilst the Government's intentions are good, it is unfortunate that the ban on consultancy charges is being introduced at this late stage in the auto-enrolment programme. There may also be the unintended consequence that some employers may not now take the advice that they might otherwise have taken and, as a result, the ban may detract from the quality of the pensions and auto-enrolment arrangements that they put in place," he said.