The U.K. recently passed a 0.75% charge cap on workplace pensions fees, in spite of lobbying from the financial industry for another delay. This cap, which used to be twice the amount, now applies to pension schemes used for automatic enrollment. Outside of the financial services sector, the law went largely unnoticed after it passed in April 2015. However, its impact has been significant, as it now requires pension trustees and governance committees to be more transparent about transaction costs and other charges they pay to ensure that pension holders get a fairer deal.
Further, the new charge cap also implements bans on levies of “active member discounts” where deferred members face higher charges than active members and “consultancy charging.” The 0.75 percent cap is set to be reviewed in 2017, when the Financial Conduct Authority will determine if further action is necessary on charges.
“It now requires pension trustees and governance committees to be more transparent about transaction costs and other charges they pay to ensure that pension holders get a fair deal.”
The impact of the new charge cap
The introduction of a charge cap might be felt in different ways:
• Asset managers will need to take a hard look at all of their fees, such has the total cost of data. To do this, asset managers can use external resources such as the TEI calculator created by Forrester Consulting on behalf of RIMES.
• Pension fund trustees will need to become more knowledgeable when it comes to understanding the fees structures being imposed by the asset managers, as they charge them back to pension members.
Additionally, the Financial Conduct Authority ruled that pension funds can no longer charge pension consultant fees to member funds. They are also prohibited from charging active and deferred pension members differently based on whether or not they are paying into the fund. In turn, pension funds will also be prevented from using those funds to pay commissions to intermediaries like pension consultants and asset managers. Ultimately, this puts pension fund owners in a position where they will now need to become proactive negotiators with asset managers, whilst retaining their current administrator roles.
Criticism of the new charge cap
Critics of the new charge cap, like the National Association of Pension Funds, argued that it creates further problems for pension fund owners at a time when competition is driving down charges below the 0.75 percent cap. In fact, in an Independent interview with Kevin LeGrand, the director of pension policy for Buck Consultants, said that the cap on workplace pension charges will drive smaller funds out, providing less options for pension holders and insurers.
“If the pensions charge cap becomes too tight, something may have to give,” LeGrand stated. “The outcome may be to increase the pace of the current trend to drive small and bespoke schemes into oblivion, resulting in all workplace pension provision being at the lowest common denominator level.”
Furthermore, some industry commentators asserted that restrictions on pension fund charges will result in employers selecting pensions that provide fewer investment options to avoid the complications of offering funds that are over or under the charge cap. According to a separate Independent interview with Malcolm McLean, senior consultant at Barnett Waddingham, this may result in employers remaining in fund investments that provide poor or mediocre growth prospects simply because they cannot afford to pay a little bit more money to gain more value.
“A 0.75 per cent cap will obviously limit the ability of employers to choose a scheme that may well have higher charges but delivers far better outcomes for their staff,” McLean explained. “On the commission ban, this will be seen as a huge blow to advisers, which some estimates suggest could cost them £150m and 1,000 jobs.”
The reality of the charge cap, from a financial industry perspective, is that although this is U.K. news, regulators around the world – especially in larger markets like the U.S. – will need to scrutinize their pension fees.