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Gov’t sets out auto-enrolment charge cap options

by Brian Cantwell on Oct 30, 2013 at 07:09

Gov’t sets out auto-enrolment charge cap options

The government has proposed three ways to cap auto-enrolment pension scheme charges in a consultation paper published today.

Yesterday pension minister Steve Webb (pictured) told the House of Commons that one option would be an absolute charge cap of 0.75% on auto-enrolment pension schemes.

The consultation has also proposed a 1% charge cap, in line with current stakeholder products.

The third option is a two tier ‘comply or explain’ cap where there would be a standard cap of 0.75% for qualifying schemes, with a higher cap of 1% available to employers who reported to the Pensions Regulator why the scheme charges exceeded 0.75%.

It said a final cap could lie in between 1% and 0.75% depending on the responses to the consultation.

The Treasury estimated that an individual who saved £100 a month for 46 years could retire with an extra £66,000 if charged 1% and an extra £100,000 if charged 0.75%, compared in both instances to charges of 1.5%.

Webb said: ‘The government believes that enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges. We are consulting on a cap on pension charges. A range of options will be on the table including an outright ban on all charges above 0.75% per year. 

‘I’m confident that we will make the system fairer for anyone being automatically enrolled into a workplace pension and will finally address the issue of charges which has been neglected for far too long.’

35 comments so far. Why not have your say?

Concerned.Consumer

Oct 30, 2013 at 08:35

A cap at 0.75% is a must. The above figures also highlight the iniquitous FBRC method that advisers use to extract fees from clients over many years. Consumers already paying enormous fees charged by greedy providers get hit again by greedy advisers trying to find ever more covert ways of making extra money . Does an adviser firm for example tell the client actually how much they will charge over a 25 year period when using the FBRC method. I doubt it. It gets to gigantic levels and is wrong. A flat fee plus vat for an initial report and a flat monthly fee for administration is the way forward for regulated advisers.

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Phil Sheppard

Oct 30, 2013 at 08:40

No cap on energy provider costs but a cap on pension providers!

Has anyone analysed the Tory party accounts to see which group donates the most?

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Arthur Schopenhauer

Oct 30, 2013 at 08:49

@Concerned.Consumer

Fees are not the problem the consumer blames anyone but themselves for not providing money for consumption tomorrow from the income of today.

They are too busy living beyond their means and using up income of the future to pay for consumption today.

Fees on the average pension pot provided by the individual would not recover the petrol money for the visit by the adviser and certainly not be worth the commercial risk to the adviser of the ever winging POM

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Andrew Moreton

Oct 30, 2013 at 08:55

@Concerned.Customer - what you are saying has nothing to do with this article whcih is about autoenrolment schemes.

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Exeter Adviser

Oct 30, 2013 at 08:59

Given that stakeholder with a 1% charge cap failed what on earth are they thinking of with 0.75%.

As for @Concerned consumer you clearly have never had proper advice and do not appreciate the costs of providing proper advice, if you did you wouldn't make such ill informed judgements and as @Arthur Schopenhauer points out it is the consumers that are failing themselves by not making adequate provision for retirement

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Nick H

Oct 30, 2013 at 09:01

@CC

1) what was your occupation / prior occupation, and did you have a Government body meddling in it all the time? What makes you the expert?

2) investments are more competitively priced now than they have been for decades.

3) the figures of £66k, £100k, and £230k ( I heard on the radio this morning) are spurious, out of context, and just taken arbitrarily from quotes and illustrations - at assumptions we know not.

4) we are not greedy.

5) the costs of simply being a regulated business have ballooned - not our fault.

6) yes we do disclose fees. Haven't you heard of the RDR. Fees are fair, disclosed, and agreed.

We deal in client outcomes, charge a fair price, and the clients of IFAs are generally extremely satisfied.

Time for the negativity to stop, and an even handed approach to the analysis and reporting of this matter. I'm dreaming of course.

Off now - work to do..

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Concerned.Consumer

Oct 30, 2013 at 09:10

@ Andrew Moreton. The article is about annual percentage fees ripping into pension pots. Just like FBRC. So my comments are very much to do with the article. Just not to your taste.

FBRC should be in the mix as well, but not just capped,banned. What after all is the point of capping provider fees and replacing the reduction with adviser fees. My comments are spot on.

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Stuart Rathbone

Oct 30, 2013 at 09:34

@CC

You would do well to reflect on this

"It's unwise to pay too much, but it's worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can't be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better." ("The Common Law of Business Balance", widely attributed to John Ruskin 1819-1900).

I am not saying that the costs as they are for a pile ‘em high sell ‘em cheep scheme are either too high or too low. That is for the market to decide, and since these schemes will not be paid for by the members but by their employers the market will decide.

The Gov’t can legislate all it wants but that may result in no supply at a cost that is economical to the providers, be that of advice, administration or investment management. You never know that may have been their plan all along to corral everyone into their nice warm nest.

Best of luck.

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Nigel Bracken

Oct 30, 2013 at 09:38

@ Nick H - your point 3 - I have only read this Citywire item so far - but the numbers in this report don't add up - £100 p.m. for 46 years is only £55,200 in contributions. Hard to see how reducing charges by a 1/3rd could generate an additional £66k return even in the crazed mind of General Webb?

Perhaps the £100 is being inflation adjusted if it is perhaps that is worthy of being reported - although it is still difficult to see how these numbers scan?

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Yaya Toure's wallet

Oct 30, 2013 at 09:38

@ C.C

No your comments are not at all 'spot on'!

Firstly RDR has now abolished commission, be that fund based or initial, to pay advisers for advised new business. Therefore we now have to advise clients and charge 'agreed remuneration' by way of a fee - that of course can come in many different guises such as hourly, fixed fee or percentage - but nevertheless AGREED.

Moreover, AE does not allow FBRC either. Indeed the relationship is not with member but rather the employer and we charge them an agreed fee for the research, report and implementation. None of which is charged to the member. FBRC has been banned for AE schemes so you are behind the times I am afraid - get up to date!

The attack/investigation/reform (take your own slant on that) of AE scheme charges is aimed at the providers not advisers, as we will be charging separate fees to employers and so not take commission or a fee from the members pot.

Can providers provide schemes for less than 1% or even 0.75% Yes of course they can. Will they is more impotant to ask becuase the vast majority refused to offer SHP at 1% so a charge cap of 0.75% could well distort the market by removing many providers - as is already ocurring anyway for smaller employers. Thus the smaller employers - less than 200 active members AND/OR those with below average salaries and so contributions are likely to be pushed into NEST.

Aha that is the purpose of the charge cap!!!!

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Beagleye

Oct 30, 2013 at 09:42

@CC. I don't want to get into a ridiculous name calling argument with you, but I would urge you to check out the facts re' the Governments solution - NEST. This has a charge cap of 0.3% p.a. plus 1.8% of every premium paid. The example that NEST's own website provides shows a fund value of £5000 and a total charge in year one of £20.40 which works out at a little over 0.4% pa. This is comparable to the annual charge of all pensions, including SIPP's that I recommend to my clients. NEST report that 99% of members opt for their pre-retirement fund. The factsheet for this fund shows one year growth of 3% and growth since launch in July 2011 of 6.4%. The returns have only just beaten inflation. That's what you get when you pay such low fees, and it doesn't serve the consumer well at all. Given a choice of a fund with a charge of 0.3% that has returned just 3% in the last year, or a fund with a 1% charge (there are dozens of them) which has returned in excess of 32% (average return of all funds in the UK Equity all companies sector), over the period since the NEST funds were launched, which would you opt for?

Please answer honestly.

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Christopher Petrie

Oct 30, 2013 at 10:08

CC (Mr Man) is a long term troll on these boards.

He likes to sell UCIS. And troll IFAs.

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Stuart Rathbone

Oct 30, 2013 at 10:17

@CP

CC is having a good day then, must stop wasting my life on these boards.

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Call a spade.....

Oct 30, 2013 at 10:44

@Nigel Bracken

If I've used Excel correctly, a return of 8.15% pa would give these results (assuming no other deductions):

£365,208 with a 1.5% charge

£431,461 with a 1% charge (increase of £66,253)

£469,440 with a 0.75% charge (increase of £104,232)

Of course, 8,15% isn't an allowable rate for illustrations..... Perhaps it's the rate at which Treasury salaries increase each year?

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Martinifa

Oct 30, 2013 at 10:48

All I will say to "enough is enough".

Let's look at your so called solution NEST.

How much of the tax payers money has been borrowed to set this up?

NEST is charging 1.8% until they repay the borrowing, this is likely to take decades. The funds are very limited, the consumer has very little say, cannot transfer out and will have a panel of annuity providers and nothing else, also selected by Government officials under the current arrangement.

Is a pension pot of £100pm going to cover the cost of looking after it. AT 1% that means in month one a return of £1, with around 15-20 hours of regulatory and Government intervention, paperwork and regulation to get through. The average pension pot I see in South Wales is around £60K so £600 per annum at 1%. What does a consumer expect for £600. That a PRIVATE company maintain business premises, staff it, cover cost of research, trading costs and provide reviews on a regular basis.

Unlike the Government and Regulators, private sector just cannot tax or levy more when they need funds. They also cannot wait 15 years to break even, this is why Stakeholder failed.

When there is no financial services industry left in the UK, how will the consumer fair them. It is time the Government and the regulator moved from this fixation on charges.

Whilst there was bad practice and high charging (3%, inflation 14%) 20 years ago, at least the nation saved, had savings, had pensions, I might add from these times we have the most pension funds under management in the whole of Europe. In fact if you add all of Europe's pension provisions together, the UK has more under management.

When the Governments can balance the books, admit they have known about this shortfall for 30 YEARS and only now are doing something, then make these comments. Otherwise shut up and leave the industry to get on with it, you have pushed the costs so low it is becoming unsustainable.

In two three years time we will have some other MP, regulator standing there making these comments. I will still be advising and have been for 34 years, where will these individuals be once they have made on god all mighty mess. Will it impact on their pensions, as clearly they have requested their funds to be placed in NEST.

SO, my final thought. All public sector workers should be placed in to NEST, their final salary schemes stopped and frozen from next April.

IF NEST IS GOOD ENOUGH FOR THE PRIVATE SECTOR the public sector who they service should be happy to have the same.

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David Salmon

Oct 30, 2013 at 11:38

Martinifa - well said Sir!

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Nigel Bracken

Oct 30, 2013 at 11:38

@ Call a spade - I've just waded through 35 pages of Impact Assessment on DWP website.

If we did not know it already advisers don't matter.

The calcs used assume a £100 p.m contribution increasing at 4% p.a. - the inevstment return is 7% p.a. the timeframe 46 years - so presumably age 22 to age 68.

So salary and conts will increase at double the Gov's target inflation rate given the nirvana Webb & the Eton boys are creating for us all.

Yep a guy earning @ £21,500 now (to arrive at a £1,200 p.a. pension cont under AE) will be earning £125k plus by retirement and the contribution @ £7,200 p.a. at that point.

The projected fund with no charges is @ £701k the annuity rate is 6% (no explanation of what type of annuity (or indeed what insurer will be left in business to provide it!) - so the fund is going to give mr example £42k p.a. income. But if he has his leg lifted by the evil that is us with a 1% p.a. charge he only has @ £532k in his pot & only has £32k p.a. income.

2 pints of what they are having please.

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Nick H

Oct 30, 2013 at 11:52

@Nigel and spade (and ref my point 3)

So this is a reliable and meaningful basis for projections is it.

I think our Mr Example will be very disappointed when he retires in 2059.

Shame he didn't pay a fee for ongoing reviews !!

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Concerned.Consumer

Oct 30, 2013 at 12:12

@Christopher Petrie. I think you will find its the so called IFA market that sold UCIS products and clearly some still are.

@Beagleye. Are you promising your clients a 32% return for a 1% fund charge. Oh dear ..here we go again. An IFA promising fantastic returns to justify to clients using their services.

@Stuart Rathbone. Yes I am having a good day

@YYW...."Therefore we now have to advise clients and charge 'agreed remuneration' by way of a fee.... "have to" , does it hurt.

Pension funding per-se should have a charge cap and FBRC be banned irrespective whether it's AE . My point is that whilst we are talking about percentage charging lets kill FBRC for all pension products. Clients are not properly informed of the real cost. Relating fund charges to possible performance such as Beagleye is hugely misleading.

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Nigel Bracken

Oct 30, 2013 at 12:39

@ NIck H - I agree - we could do are own hatchet job on the assumptions, the realities etc - but who cares and who apart from this Citywire blog would report it?

How is passively invested, lifesyled NEST with it's ultra conservative early years investment strategy going to achieve an average 7% p.a. return? The FCA would not allow predictions to be made on that basis I suspect but then NEST does not have to play by the same rules and have it's feet tied together.

Today I have seen the Telegragh, the FT & The Guardian reporting of this & there is not one query on the numbers or assumptions and all basically reporting that rip off charges are being capped.

Webb clearly wants 0.75% (probably revisited and dropped in future), this, like most "consultations" is a done deal. It guarantees plenty of inflow to NEST - making that a "success" although clearly makes the capacity problem much worse.

As I see it it is just part of the agenda - 0.75% becomes the defacto maximum charge for all financial products, resulting in basic simple products with little to go wrong that causes consumer detriment so proving that adviser charge is unnecessary so it can go the way of consultancy charge and RDR will have "worked" with Dodge having been cleaned up!

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Phil Sheppard

Oct 30, 2013 at 13:00

Entertaining board everyone!

@CC clearly had some good knowledge at one point but has not updated this; probably is a recently retired accountant with a grudge. I expect to see a lot more of CC on boards. I certainly hope so!

The 0.75% headline was no doubt invented at short notice to grab headlines and push energy prices rises off the front page. I don't understand why the Government doesn't simply insist on no costs or charges.

Will everyone's pension savings end up safely in Government pension schemes, helping to fund the National Debt?

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Call a spade.....

Oct 30, 2013 at 13:18

@Nigel - thanks for the explanation.

Time was when the media would have been challenging these figures and how they were arrived at, not just reporting them. The proverbial man in street hears these numbers on the radio or TV - so they must be right - disdains any advice and, as Nick H says, will be very disappointed come 2059.

@Citywire - how about going to Mr Webb and asking him to justify his numbers - and how NEST can produce this amazing "value for money"?

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Concerned.Consumer

Oct 30, 2013 at 13:41

@ Phil Sheppard. Given that the pensions Industry has made such a pigs ear of private pensions, some sort of strict government control must be looked at. Its too important to leave to an Industry set up entirely for the purposes of making profit.

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Phil Sheppard

Oct 30, 2013 at 14:04

@CC

It could be argued that Government actions by using QE to suppress interest rates, in order to save money on Government Debt, have damaged savers and in particular pensioners by cutting annuity rates. The impact of that is far worse than all the charges discussed on this board.

I've been an adviser for 30+ years and warned against Equitable Life, Barlow Clowes, Keydata, etc. Yes there is and has been plenty of bad practice/advice but huge improvements have been made. So it isn't all bad but there is still plenty to do.

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Nigel Bracken

Oct 30, 2013 at 14:13

@c.c - indeed, energy, infastructure, water supply, pharmacy etc all should be in hands of the State - as they really are too imprtant to be run entirely for makeing profit.

Accountancy, media etc too while we are at it - the State does a great job of managing projects and services in a timely & efficient manner ...!

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John Mather

Oct 30, 2013 at 15:00

@Concerned.Consumer

I'm not sure that you understand The industry has not made a pigs ear As has been said earlier in this message the problem is that the consumer does not make sufficient budget available.

The State has messed around with legislation since the early 1900's they worked then as you received the pension when you were 70 when life expectancy was 48 so you could adjust that working scheme to present day mortality and make the retirement age 115.

Try selling that to the electorate better to sell them the idea that they can retire for 3% or so of current pay put into an anemic fund that cheaply melts value

The problem is just one of time and money you can increase one or the other or both but you cannot less of both

Nor can you have the respect and trust of the public in the concept of a pension if the Government changes the rules with a major pensions act every 7 years with a proposed life of 20+ years

Couple that with a culture of blaming some one else rather than self and you have a recipe for the apathy party and planned poverty

As with the Maxwell scheme there is a big fat Czeck missing from most schemes

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Stuart Rathbone

Oct 30, 2013 at 15:02

Phil Nigel et al,all good points but stop feeding the troll and invest you time in those that value you service, the rest can go hang.

Got me at it again wsting my time

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David Salmon

Oct 30, 2013 at 15:24

ConcernedConsumer - as you clearly have such useful knowledge to impart, perhaps you'd care to comment on the viability of the DWP's assumptions for their projections which are driving the highly unbalanced & misinformed media commentary we are hearing today?

If this doesn't increase the AE opt-out rates, I don't know what will

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Martinifa

Oct 30, 2013 at 15:32

Concerned.Consumer, you are wrong, easily confused and actually believe what you are told by MP's, I wish you would get your facts right.

If the industry have made such a pigs ear of it, why is it that the UK has more private pension provisions then the rest of Europe put together.

The fact is MR & Mrs consumer have not funded pension. They either have not saved enough or not at all, relying the Government . The Government has known since the early 80's they had a problem, yet until it has reached crisis point, selected not to put votes at risk and tackle the problem.

As for the cost, why don't you spend your time and money at the suggested 0.75% charging structure today and set up your own pension offering for the consumers. If I give you a £100 per month you will earn around £9 in your first year. Answer me this, can you do that?

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John Mather

Oct 30, 2013 at 15:36

Is there a correlation between ill informed comments an anonymity ??

CityWire should perhaps only allow real names it certainly would improve the quality of the debate as the wind up clowns could go elsewhere

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John Mather

Oct 30, 2013 at 15:44

@Martinifa

You are not going to educate the people who believe what it says on the red tops

Incidentally I know Norway is not a full EU member but the national wealth fund has about $216,000 per man woman and child of real money in the fund but then they did not have the benefit of our politicians to save the bonus of north sea revenues

Thanks Gordon etc

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Jonathan Kirby

Oct 30, 2013 at 16:08

@ Stuart Rathbone

I echo your thoughts.

The more I see some of the twaddle, I feel that CC is actually MM come back to haunt us!

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j p

Oct 30, 2013 at 22:11

The DWP have been disengenuous with the figures.

A new-entrant would only be 22 if every AE joiner is this age. Data suggests they are 41.

The difference between a 0.75% and 1% amc , assuming 3% salary growth and 6% investment return over 20 years ( unless they also believe everyone will have a full working life ) , and assuming a 3.5% annuity conversion ie LPI with a 50% spouses, would give an extra

50p per week

Yes this is correct if you express the numbers in current day terms.

Really really dodgy stuff. Advisers would get take to task following the same approach.

Shocking lack of professionalism or machiavellian ? Take your pick

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j p

Oct 30, 2013 at 22:11

The DWP have been disengenuous with the figures.

A new-entrant would only be 22 if every AE joiner is this age. Data suggests they are 41.

The difference between a 0.75% and 1% amc , assuming 3% salary growth and 6% investment return over 20 years ( unless they also believe everyone will have a full working life ) , and assuming a 3.5% annuity conversion ie LPI with a 50% spouses, would give an extra

50p per week

Yes this is correct if you express the numbers in current day terms.

Really really dodgy stuff. Advisers would get take to task following the same approach.

Shocking lack of professionalism or machiavellian ? Take your pick

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Nick H

Oct 31, 2013 at 11:26

Ha ha can you imagine!

Sir, we are churning your pension into a cheaper scheme so your staff will all be £100,000 better off at retirement.... Honest !

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