Consultancy charging ban set to hit SMEs

Pensions minister Steve Webb announced on Friday his intention to ban consultancy charging, following a six month review. It concluded that the practice of deducting money from members’ contributions or pots to cover the cost of advice to an employer or employee was “not appropriate”.

As part of its clampdown on pension charges the government will publish a consultation in the autumn, which will outline proposals for a cap on default fund charges in defined contribution schemes. This will be launched in light of the forthcoming Office of Fair Trading report on workplace pensions.

Some smaller employers who would previously have considered using consultancy charging to help pay for the cost of implementing their workplace pension are likely to struggle, said Tom McPhail, head of pensions research at Hargreaves Lansdown.

“It is complicated, and employers will need help. In many cases they are going to end up dealing with this on a DIY basis and for some employers, they will muddle through,” he said.

Smaller companies could end up with no choice but to pay for the advice themselves or use a mastertrust like the National Employment Savings Trust.

“In the short term, I don’t think it has any impact at all because the big employers tend to pay fees to their advisers, and as a consequence they don’t really use consultancy charges," said Richard Butcher, managing director at Pitmans Trustees.

“But as we drill further down into auto-enrolment and we get to the smaller employers, we’re going to find employers that haven’t got the money to pay for advice. The risk is that they will do it as cheaply as they can.”

The government’s intention to only cover auto-enrolment schemes with its ban could create possible “loopholes”, according to Alexandra Morton, associate at Squire Sanders.

“Where there could potentially be scope for loopholes, for example, might be where a company sets up one scheme for auto-enrolment, but also has legacy pension arrangements which might fall outside the scope of the ban,” she said.

A spokesperson for the Department for Work and Pensions said this was unlikely to happen at many employers. "We intend to make regulations as soon as possible to ban consultancy charges in automatic enrolment schemes," said the spokesperson. 

"Furthermore, the pensions bill, which was introduced last week, contains provision to allow us to introduce similar restrictions in relation to qualifying schemes."

Plans to cap default fund charges should not impact members that wish to exercise choice about where they invest, said McPhail.

“Whether it is a stockbroking account, buying shares directly or going to some emerging market fund, I don’t anticipate the DWP will look to restrict those,” said McPhail. “I think [the government] are simply looking at those 80-90 per cent of people that will go into those default funds.”