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UK pensions industry cautiously welcomes charge-cap proposal

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The UK government has seen a mixed response from the pensions industry, as it remains divided on the impact of a proposed 75 basis point cap on the default fund charge in auto-enrolment schemes.

Yesterday, Steve Webb, the pensions minister, confirmed the government would look to impose the cap by April next year.

The government chose the strictest proposal of the ones announced to the industry last year, for consultation.

In what Webb described as a “full-frontal assault” on high charges, he moved against lobbying by the insurance industry, and the recommendation of the Office of Fair Trading.

Government opposition MPs were forced to welcome the cap in defined contribution (DC) schemes, while accusing the government of stealing Labour policies.

Gregg McClymont, Labour spokesman for pensions, said the policy was Labour’s “lock, stock and barrel”, but the delay until 2015 was a huge concession.

“Who has ever heard of a ‘full-frontal assault’ [on high charges] that comes with a 12-month notice period?” he asked.

The National Association of Pension Funds (NAPF) welcomed the focus on value for money but warned against assumptions that a cap would do this.

Joanne Segars, chief executive at the lobby group, said appropriate default funds, good governance and communications were also necessary.

The government also announced transparency requirements on fees, and for non-trust DC schemes to implement independent governance committees.

“[The committees requirement] does not go far enough and risks not being aligned with the long-term interests of scheme members,” Segars added.

The state-sponsored DC provider, the National Employment Savings Trust (NEST), said the cap was confirmation of a good value benchmark for employers.

Tim Jones, chief executive at the fund, said: “These arrangements will provide welcome clarity for consumers and employers on what good value means.

“We also welcome the moves to provide greater transparency on the other charges made by pension schemes, particularly in relation to investment.”

However, the People’s Pension, a not-for-profit DC master trust, accused the government of creating additional confusion over cleaning up pensions.

“The government’s proposals for accommodating front loading charging structures risks causing a mass upheaval in the pensions market,” said Darren Philp, head of policy and the scheme.

“A contribution charge of 2.5%, combined with an AMC of 0.4%, is not in any member’s best interest.”

Warnings also came from Towers Watson, which said the cap would improve the perception of DC schemes but not the reality.

John Ball, head of pensions, said large employers would already be paying less than the cap.

He also pointed out that the cap did not account for distribution costs, or where trustees chose a higher risk/return payoff.

“If a charge cap makes any difference to these schemes, it may even increase charges very slightly – for example, because information will have to be collected in different ways or because pension providers must hold more capital,” he said.

“0.75% is far too much to be paying for a basic product.”

Further disapproval came from the Association of British Insurers (ABI) and the Investment Management Association (IMA).

Otto Thorensen, director general at the ABI, said that, with charges at their lowest levels ever, he did not agree with the cap.

“In this context, the decision to phase in the implementation of these changes is helpful,” he said.

The IMA, which represents providers of default funds, said a cap would not be the best way to achieve scheme quality.

Jonathan Lipkin, director of public policy, said: “The main focus should be on improving governance structures and standards across the DC environment.”

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