'Cap our charges and small businesses will pay more': Pension providers warn price cap will drive up costs for firms
Plans to cap the cost of workplace pensions following the introduction of auto-enrolment for workers could harm small businesses who will have to pay more in charges, pension providers have claimed,
Caps on charges for automatic enrolment pension schemes have been put forward by pensions minister Steve Webb, with annual fees of 0.75 per cent to 1 per cent proposed, and industry opinion on a cap remained split as the Government's consultation on the plan came to an end.
The level of the yearly charge on the amount people have saved in their pension funds can have a significant effect on the total amount they have when they come to retire, with a 1 per cent charge potentially eating up between 20 and 30 per cent of savings.
Impact: Pension experts have warned that introducing a charge cap could see added costs passed on to small businesses.
But with many automatic enrolment pension providers already providing schemes that charge lower than 0.75 per cent, many are questioning the wisdom of introducing a cap as they believe competition is already driving prices down.
Introducing such rigid caps as well could mean that costs are passed on elsewhere, for example by increasing the price for setting up pensions in the first place - which could have a significant impact on small businesses that are due to auto-enrol in the coming years.
With employees getting charged less for management fees, small companies could find themselves hit with larger bills for setting up pension schemes, at a time when they'll already be struggling with the added costs of offering a workplace pension.
Mr Webb has also suggested this week that any cap that's imposed could fall further in the future, to as low as 0.5 per cent.
Phil Loney, of Royal London, said: 'Our research strongly demonstrates that charges on Workplace Pensions will fall much further if left to a competitive market (a fall of as much as 40 per cent), so introducing a cap now will trap costs at today’s levels.
'Shareholders will be the only winners through the introduction of price controls. The price cap will rapidly become the floor.
'The losers will be members of schemes whose pensions will not benefit from the anticipated fall in charges that we anticipate in a free market. The other losers are smaller employers who will be forced to pay set up charges outside the capped annual management charges.'
This sentiment was echoed by Tom McPhail, of Hargreaves Lansdown, who said that pension providers would still find ways of passing on costs to employers.
He said: 'It is important to note that if you impose a price cap, you don’t make the costs disappear, you just push them somewhere else and it will be small businesses that have to pick up the bill.
Crackdown: Pensions minister Steve Webb wants to ensure value for money for automatic enrolment pension schemes.
'A price cap lower than 1 per cent would cause hundreds of thousands of small businesses and entrepreneurs to have to pay additional costs towards the setting up of their workplace pension.
'At a conservative estimate, a price cap below 1 per cent would mean every small employer would have to pay between £4,000 and £14,000 in additional administration costs for their pension scheme; it would be bad news for small employers struggling to turn a profit.'
Mr Webb told Radio 4 today that a cap would ensure people are getting value for money from their pensions.
The cap will crack down on older, higher charging pensions, known as legacy schemes, that were set up prior to 2001 and can carry management charges pf up to 2.3 per cent.
But Mr McPhail claims that less than three per cent of defined contribution pension assets are in schemes that charge more than 1 per cent, while a cap of lower than 1 per cent could cause thousands of employers to have to redesigned their pension arrangements.
But John Pollock, of Legal and General, said any cap should be lower than 0.75 per cent - at 0.5 per cent - for automatic enrolment schemes as well as legacy schemes outside of auto-enrolment..
He said: 'Legal & General is in favour of having a meaningful cap at 0.5 per cent, not only for new auto enrolment schemes, but for legacy pension schemes as well.
'It is here in the legacy world that savers maybe getting a poor deal, with fees at much higher levels. Competition is driving down the cost for new auto-enrolment schemes, but is having no real impact on legacy schemes because employers have historically rarely switched suppliers.'
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