News analysis: Managers of large defined contribution schemes have responded to the government's proposed 0.75 per cent charging cap on auto-enrolment arrangements, largely feeling they already fit within the requirement currently under consultation.
A consultation issued today by the government included three options for a cap on the schemes employers use to meet their workplace pension duties (see box), including the 75-basis-point cap.
Charging consultation: key points
There are three options for the cap:
A charge cap of 1 per cent of members' funds.
A cap of 0.75 per cent, "reflecting the charging levels already being achieved by many schemes".
A two-tier cap including both levels, allowing 1 per cent for those that can demonstrate value.
Mike Nixon, head of pensions at defence company Finmeccanica, which is the sponsor of more than one DC plan, said his pensions team was broadly comfortable if such a ceiling was set, regardless of whether it was calculated on the annual management charge or total expense ratio – which also includes operational and transaction costs.
"We fit within 0.75 per cent on both AMC and total expenses, but we'll await the detail," he said. "The devil's in the detail."
The multi-employer Printing Industry Pension Scheme currently runs an AMC of 0.43 per cent.
The government is consulting on what should be included in the calculation of the cap, such as transaction and annuity broking services, given concern about hidden costs for members.
Barry Dixon, secretary to the scheme, said: "If the 0.75 per cent is the scheme charge from the provider, we are well below that. [That level] seems sensible."
But he added it would be "much easier" if that level included consultancy charging, which has historically been an element of the scheme's charging structure.
The government's consultation asks for views on the impact on schemes and the wider industry of extending the ban on consultancy charging to all qualifying schemes, for both new and existing members.
Impact on smaller employers
But while the scale of these larger schemes means it is easier for them to get better management deals, the government and industry figures have expressed concern that smaller companies with less buying power would struggle to keep fees down.
Stephen Nichols, chief executive at The Pensions Trust, said its SmarterPensions auto-enrolment platform has a 45bp charge. "It is not going to impact on us," he said. "We are well within the 0.75 per cent."
It has not been in operation long enough to gauge the first year's transaction costs, but Nichols said he did not expect them to add much on top. "We wouldn't expect it to be very much more than 50bp overall," he said.
Nichols welcomed a higher barrier to entry when it came to smaller employers, which could mitigate any new providers such as mastertrusts coming to the smaller-employer market with exorbitant fees, adding: "It is not going to be attractive for people to enter into the market for very short periods of time."
Speaking at Pensions Week’s UK Leadership of Pensions Summit last month, Lesley Williams, group pensions director at Whitbread, spoke against an obsession with pushing down fees.
She said: “We’re in danger of pushing ourselves towards the very cheapest arrangement that we can have, without any consideration of value or the type of service we can get or indeed the type of investment arrangements we can make available to people, and that worries me."
The company's UK scheme offers a diversified growth arrangement that provides value for money for members through spreading risk, although it is not the cheapest strategy out there, added Williams.
