Workplace AE pensions charges will be capped at 0.75% from April 2015 but could the cap be extended into the rest of the personal pensions market?

28 April 2014

The Department of Work & Pensions recently declared on the long-awaited charges cap for Auto-Enrolment (AE) workplace pension schemes. The change will be enforced from 6th April 2015. The 0.75% cap does not include transaction costs at this point and only refers to the ‘default’ funds used by the millions of Auto-Enrolled staff.

Hymans Robertson recently estimated that 30-35% of AE scheme providers are currently writing business above the upcoming cap level. Many of these players will drop out of the market and other will no doubt hit a capacity crunch which is widely anticipated to sweep the AE market by the third quarter of this year, if not before.

Choice of providers in this massively growing market may narrow quickly. Nevertheless over three million workers are already auto-enrolled and a total of eight million are likely to be signed up by the completion of the last staging dates in November 2017. Just this month 30,000 employers reached their staging dates. The opt-out rate is roughly 10%, one third of the Government’s prediction, so on all measures AE has been a success thus far. In addition to the charges cap, from 2016 adviser commissions and Active Member Discounts (effectively additional charges which are applied to members of employer schemes once they have left that employer but the member pot is still running) will be banned.

If the charge cap is judged a success could it be rolled out to the rest of the DC personal pensions world or will the Government leave the RDR’s charges transparency requirements to do their work to bring down charges across the board more naturally? It is too early to judge but clearly Steve Webb’s efforts to safeguard the auto enrolled seem sensible.

Mr Webb is looking for other ways to safeguard the newly enrolled pension savers. Some of these measures still need ironing out. Many of them are buried in the latest Pensions Bill due to pass into law next year (election permitting). One such is whether to go for a pot follows member automatic system or an aggregator scheme for AE pension pots worth £10,000 or more and that otherwise by left dormant when an employee moves jobs. Webb favour the former, his Labour counterpart the latter.

There are two likely approaches to automating the pot follows system: either creating a central IT system which does the work automatically when employees move, or a document-based system similar to the P45 which is passed to a person’s new employer – leaving that employer to trigger a process of getting the pot transfer to their scheme. We wait with baited breath to hear the outcome of consultations in this area.

We also need to consider whether the increase in the so-called trivial commutation limit to £10,000 (for up to 3 pots) announced in the latest Budget changes, will lead to many more small AE pots being cashed in rather than allowing them to be rolled up into existing employer AE schemes. It might have an impact but the fact that trivial commutation only applies if you are close to or over 60, makes this less of an issue than many commentators have indicated.

Suffice to say, such is the size of the Auto-Enrolment market that administering it cost effectively must inevitably demand more sophisticated and more integrated IT systems that can manage administrative task in an automated and largely seamless (and therefore cheap) manner. Dunstan Thomas, as one such IT provider, will not be alone in looking for relevant IT partners to integrate with as the AE world we serve continues to grow like topsy.

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