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UK government shown 'red card' in attempt to cap pension charges

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The UK government’s attempts to end excessive pension fund charges have been thrown off course after its own regulatory policy committee (RPC) branded a key government document “not fit for purpose”.

The committee – which scrutinises government proposals before they become law – has given a “red” opinion on the impact assessment carried out by the Department for Work & Pensions (DWP) on proposed legislation to reduce pension fund charges.

Impact assessments are normally carried out as part of the legislative process to estimate the likely costs and benefits, as well as associated risks, of proposed legislation that has an impact on business, civil society organisations, the public sector or individuals.

The RPC then provides an opinion on the quality of analysis and evidence presented in the impact assessment, which will help determine whether the legislation goes ahead.

The government’s pension charge proposals suggest three options: do nothing; improve disclosure of charges; and set a charge cap on the default fund for automatic enrolment.

The RPC said: “The evidence presented does not adequately demonstrate why Option 3 is considered to have a zero net impact on the pensions industry.”

According to the impact assessment, Option 2 – which requires an increased disclosure of information by pension providers – is expected to cost the industry £172m (€204m), whereas Option 3 – an industry-wide charge cap in qualifying pension schemes – is only expected to cost the industry £19m.

But the RPC said: “It would appear some pension providers may be making excessive profits above the expected norm. If this is the case, then Option 3 will result in a profit reduction for many of these firms. The evidence as it is currently presented does not adequately demonstrate why Option 3 is considered to have a zero net impact on the pensions industry.”

It added that certain other potential costs did not appear to have been identified – for instance, ongoing costs to pension providers for providing the required information on charges under Option 3.

The RPC’s report also said that, given the fact most pension charges are currently no more than 1%, a possible effect of a charge cap would be that providers charging less than this cap would tend to increase their charges to the level of the cap without losing customers.

“The likelihood and impact of this outcome should be explored in more detail,” it said.

It also questioned why a combination of Options 2 and 3 had not been discussed, given that they appear to result in different benefits – i.e. better transparency under Option 2, and a charge cap under Option 3.

Darren Philp, head of policy at The People’s Pension, said: “The government’s charges impact assessment has been shown the red card by its own regulatory policy committee.

“This was a consultation that lacked detail and was built on sand, and the government now needs to rethink and pick up the gauntlet thrown down by the recent Office of Fair Trading (OFT) report to improve transparency and comparability across pensions.”

Alan Morahan, principal at Punter Southall, said: “The impact assessment states that, if a cap of 0.75% is introduced, 90,000 employers will no longer be able to use their existing pension scheme for auto-enrolment.

“It goes on to state that the transitional cost of setting up alternative pension provision would be around £55m.

“This implies an individual employer cost of around £611, which is a significant underestimate.”

Morahan said the costs of successfully completing auto-enrolment for a smaller employer would be an order of magnitude greater, at around £5,000, with provider selection, negotiation and implementation costs of around £3,500.

A more accurate cost estimate would therefore be £315m.

“We would urge the DWP to give a clear indication that any of the proposed changes will not be implemented for at least 12 months,” Morahan said.

“This would give employers and the pensions industry time to deal with the huge numbers reaching their auto-enrolment staging date in the first half of 2014.”

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