It’s no wonder that the charges cap was shelved
Most people in the pensions industry know this feeling well.
You oppose an idea/proposed law/new way of doing things because it doesn’t fit with your world view/lacks practicality/just plain doesn’t make sense.
You voice your feelings of discontent and apprehension, at first quietly and then with increasing vehemence.
The idea is introduced, nevertheless.
It is for this reason that a decision to delay the introduction of a charges cap by one year has pleasantly surprised the pensions industry.
Steve Webb told a CBI conference this morning, “The plan is to get out in a single package changes to charges, to governance, to transparency, to be implemented in April 2015.”
Webb and his team listened to the industry’s concerns about the initially tight timeframe, under which a charges cap would have been introduced in April 2014. “Doing it at a rational pace makes sense,” says Webb.
Pensions minister Steve Webb: a fan of a charge cap
Pensions minister Steve Webb was publicly very committed to introducing a charges cap. After today’s announcement, questions will be asked over whether the cap will be diluted as a result of the industry’s feedback.
“I am not going to come up with the figures today,” Webb told the CBI conference.
The cap has had many critics who have argued variously that a cap is a blunt instrument which could suppress investment innovation, it would be difficult to implement (because of all the different parties and charges involved), it could result in providers levelling up their charges to the point of the cap, and that the idea was simply an ill thought through political point-scorer.
The Office of Fair Trading also weighed in against a charges cap in its influential report on the auto-enrolment market.
The OFT’s report said: “Charge caps create a risk of unintended consequences. Set too high, a cap can become a target for providers. Set too low, a cap can create incentives for providers to lower quality and/or impose charges elsewhere.”
“Charge caps create a risk of unintended consequences”
The Regulatory Policy Committee (RPC) struck another body blow to the proposals on 18th December last year.
The RPC, an independent body which scrutinises regulatory proposals, decreed the assessment carried out by the Department for Work and Pensions on the cap’s likely impact was “not fit for purpose”.
The RPC decided that the DWP had not sufficiently justified why a charges cap would have a zero net impact on the pensions industry.
The watchdog explained: “[A charges cap] is currently assessed as only a having a transition cost but given that it will require employers to ensure that the scheme they choose is in line with the proposed price cap, it is likely that pension providers will incur some on-going costs from providing the required information on charges.”
A red card from the RPC – the first ever handed to the DWP – must have been the worst possible Christmas present for Webb and his team.
Further scuppering plans to introduce a cap were rumours of disagreements between the DWP and the Treasury over the level of the proposed cap, with the Treasury preferring a higher cap and the DWP favouring a more stringent one per cent.
“I think [the Treasury] are more conservative in their thinking, and [believe] you leave the free market to determine prices. By imposing a charge cap of 0.75 per cent, you are really determining what the market is going to look like and you’re not giving much scope within that for there to be quality schemes or active managers, for instance,” says Laith Khalaf, Hargreaves Lansdown’s head of corporate research.
The minister’s timetable for introducing a cap was always ambitious. Having to respond at haste to the charges consultation, which ran at the end of 2013 for barely a month, raised the industry’s hackles.
The DWP proposed implementing the cap in April 2014, which would have been inconvenient to employers who had already made plans for auto-enrolment.
“The imposition of a cap, at what would have been very short notice, would have caused many employers who are reaching their automatic enrolment staging dates shortly and who have already agreed the terms of their offering, to have to review their decisions,” summarises Kevin LeGrand, head of pensions policy at Buck Consultants.
With all these problems in the balance, there’s really no wonder the introduction of a cap has been postponed. But will the idea be revived eventually?
“The question is how important are charges going to be at that point and are there going to be bigger political footballs?”
“It’s difficult to know how it’s going to play out,” says Khalaf. “If you look at this time next year… that’s prime electioneering time.
“The question is how important are charges going to be at that point and are there going to be bigger political footballs? I suspect that there might well be.”