Government Announces Pension Cap Proposals

Proposals Set To have Huge Practical Issues For Employers

30.10.2013

David Shirt, Press Officer | 0161 838 3094

The Government has today said that it is planning to introduce a cap on annual management fees charged by pension providers.

The announcement that the Treasury is consulting on the issue could eventually see caps between 0.75% and 1% applied to management charges.

It is expected that the plan could save people tens of thousands of pounds as some older schemes set up more than a decade ago have been found to charge up to 2.3% a year in management fees.

According to the Office of Fair Trading (OFT) there are possibly more than 186,000 pension pots with £2.65bn worth of assets subject to annual charges of more than 1%.

The consultation document is proposing three possible options - a 1% cap, a 0.75% cap, or a two-tier "comply or explain" cap. Here pension providers will be capped at 0.75%, but have the option of increasing it to 1% if they can justify it to regulators.

The proposed cap would also only apply to auto-enrolment funds.

Launched in October 2012, auto-enrolment makes it necessary for all UK employers to place all ’eligible jobholders’ into a qualifying pension arrangement. All employers are obliged to contribute to that pension arrangement and monitor their workforce, as well as keep records of their workforce’s membership of the scheme.

The laws came into effect for the UK’s largest businesses last year and, from April 2014, firms with a PAYE scheme size of between 249 and 160 will need to be ready. Firms with fewer staff members will be required to comply with the rules by a particular ‘staging date’ according to their size up until 2018.

Expert Opinion
This could be good news for employees as it can potentially increase the value of a pension pot considerably. It is also further evidence the government is focused on addressing perceived obstacles to the successful implementation to auto enrolment.

“The Pensions Regulator already suggests employers should be choosing schemes that give members value for money. This announcement makes it even more important that employers ask their advisers for detailed information regarding costs and potentially now ensure that they are in the low range suggested by consultation.

“For those that have already passed their auto enrolment staging date and put a scheme in place, or are using an older scheme with an annual management charge of over 1%, it is vital that they ensure their advisers keep them up to date with the outcome of the consultation. If the proposed cap is adopted, it is important however that guidance is provided by the Government for these employers so that they are not penalised for any their previous choice."
Nigel Bolton, Partner