Pension charges: Is transparency enough?

December 2, 2013 at 20:21

‘Hands off our pensions’ they cried… WHICH Campaign
‘Don’t dumb down pensions’ she qualified… Ross Altman BBC Today Program
‘Don’t mess with our free markets’… Various industry bodies

Amongst these battle-cries, where does CFG stand on governments recent ‘fairer workplace pensions: a consultation on charging’?

First off, why is it important? There are approximately 25000 charity employers, 22000 of whom are small employers who must comply with auto-enrolment legislation from 2015 onwards. We have been working to support the sector through this new legislation as it threatens to prove costly for many employers who have limited experience of pension schemes. This latest DWP consultation scrutinises the annual management charges (AMCs) of these schemes, that apply for investment handling, governance, communications and advice. The outcome of the consultation will further affect charities (and all employers) set to auto-enrol, so we are representing their views to ensure that their interests are taken into account, and to try and mitigate any negative consequences.

If we were to condense our position into a catchy slogan it might read something like: ‘Don’t forget about us’ or, ‘Shockwaves of auto-enrolment yet to hit charity sector, initiate emergency response plan’.

In reality it reads somewhat less melodramatic, more of this to follow.

The consultation probes two key areas which the Office for Fair Trading’s (OFT’s) OFT’s recent ‘Defined contribution workplace pension market study’ has identified as symptomatic of (and perhaps responsible for) pensions market failing, namely, a lack of transparency and sometimes inexplicably high charges. The OFT exclaims that ‘the buyer side of the DC workplace pensions market is one of the weakest that the OFT has analysed in recent years.’

Strong words… what recommendations have been made to offset these remarks?

· Improve market transparency around charging to drive fair competition and ensure that employers are incentivised to choose schemes in the interest of their members.
· Introduce a cap on charges to protect scheme members from being subject to spurious charges which significantly reduce their retirement package.

In our response to government we focussed on three main areas:

1. Some unique features of the sector

We reminded government of a number of features:

· Alongside prioritising their employee’s welfare, the sector has unique obligations towards our beneficiaries, donors and public at large;
· Charities run on tight financial models, squeezed further in recent times; and
· The large majority of the sector is made up of small to medium sized organisations.

The usual lines of defence, but pertinent ones here nonetheless, as I explain next. We used them to highlight that transparency will help the sector fulfil its obligations by enabling charities to report more accurately on decisions about scheme enrolment, allowing them to come forth boldly and tell their employees what employment package they are offering. Critically, this will help to ensure that charitable expenditure is not needlessly frittered away on, a) low value pension schemes, and b) time and resources spent deciphering charges on pension schemes (this holds true especially for small charities).

We argued, for a mandated disclosure under a commonly defined single charge (with the proviso that additional information as to what actual fees this charge reflects is readily accessible).

The recommendations for transparency and disclosure have been broadly welcomed by industry experts.

Does it automatically follow that caps on AMCs would drive further value for money for small charities? Government, suggest that SMEs lack the incentives to act preferentially on more transparent charging disclosure alone. But, at risk of being accused of banging on about it, charities are not governed by the same rules and incentives as SMEs.

2. The auto-enrolment landscape for small to medium sized charities (let’s call them SMCs) will look substantially different from the one we know now

We already know that both employers and scheme providers are going to face an enormous amount of pressure when auto-enrolment infiltrates down to SMEs. In our recent ‘Auto-enrolment for charities: a how-to guide’, we have asserted that this concern should be extended more prominently to SMCs. We also know that promising market data from the grand initiation of auto-enrolment (such as 0.5% average AMCs on market entrants, low opt-out rates and minimal compliance penalties) cannot be readily projected onto future trends. There is a real risk that caps set too low risk narrowing the pool of schemes available for charities. This will result in preventing them from choosing providers of choice.

CFG supports the introduction of a charge cap, and has a slight preference for the measured two-tier comply or explain cap of 0.75% and 1% respectively. A risk-averse option is essential since accurate market data is not yet available for auto-enrolment with SMEs.

But key players in the industry differ in opinion. Some have remained quite neutral as to which charge option is appropriate. They have support for to keeping check on excessive values, but also highlighted that caps risk dulling competition in the market. Some have suggested that a 0.75% cap does not go far enough, proposing a lower ceiling of 0.5% to achieve maximum value for savers. Other bodies are adamant that scheme quality is accounted for in charging fees; scheme providers ought to be free to set charges as they please to reflect this quality.

3. The sector needs sufficient warning to respond to changes

Our recent pension’s survey and guide places heavy emphasis on the fact that charities need at least 12 months to prepare for auto-enrolment. Government’s suggestion to introduce caps in 6 months’ time conflicts with this recommendation. If pushed forward regardless, charities may find themselves in a situation where they have to commit more resources to re-planning based on new schemes that follow new rules.

When introducing new legislative burdens, sufficient time needs to be given to ensure fair warning. CFG propose that an introduction date of the end of 2014 will be of superior benefit to an April 2014 date when factoring in preparation resources for auto-enrolment staging dates.

How government responds, and what impact this will have on auto-enrolment implementation is yet to be seen. CFG will continue promoting our members interests. See the full consultation response here.