Legacy is the real issue

The Government has to bring in a charge cap to cover its back says Teresa Hunter

This Christmas could be the last chance for many corporate advisers to eat drink and be merry because tomorrow their income stream could be choked off in its prime.
Government plans to cap charges on work place pensions, probably at 0.75 per cent annually, may be a good thing for savers. Indeed, some form of charge constraint was inevitable, given State plans to strong-arm millions of employees into pension schemes not of their own choosing. There will likely be a big enough scandal anyway when many of these contracts mature… those that have not already been “liberated” along the way. Heaven help those poor mugs.
Some employees promised a good pension will be gutted when they see how little they will get. Excessive charging would pour more oil on those flames.
Decent politicians, of which happily there is a surfeit at the Department of Work and Pensions, probably couldn’t sleep at night knowing they were forcing those on low incomes into the rapacious clutches of the pensions industry. Was there ever such a case of lambs to slaughter?
So anyone who thinks a price cap is still avoidable is living in cloud cuckoo land.  The bigger question is what will it apply to? I wish I had a fiver for every time I am told high costs are a thing of the past, because 75 per cent of charges are lower than 0.9 per cent. It would certainly pump adrenalin into my own lean pension planning.
And that’s the point. When it comes to new schemes, the game is already over. The industry has rolled over, in the face of a tsunami of new business the like of which it could once only have dreamed, flowing in its directly without it barely lifting a finger. The slog of selling is history. Fat commissions are no longer required.
But this is a long-term game. These schemes will have sweet fanny adams in them for some time to come. Squabbling over what percentage you earn of initially very little is not worth the fight. According to DWP, it is going to take five years before all this activity generates an additional £11 billion of annual pension savings.
Big number I know, but peanuts compared with the hundreds of billions of pounds stowed away in legacy schemes, where charges are higher, not least as a result of initiatives like active member discounts.
A much bigger problem, and where the serious money is held. This is the battle the likes of the Association of British Insurers will fight to the bitter end to protect higher margins. And this is a fight I sense the Government has less of a stomach for.   
The ABI already emerged victorious from the first skirmish when it successfully pressed to be allowed to run the audits of legacy scheme charges, which many believed the regulator’s job.
One of the industry’s greatest skills is fighting rear-guard actions. Like First World War generals they dig in. They fight to the bitter end, regardless of how much blood is spilled, to hold on to the ground on which they stand. Any new regs will make sure no employees will be able to be enrolled into high charging schemes, but will they stop employers and insurers closing former schemes, and leaving that money to rot?
When it comes to spilling blood, expect it to be that of advisers. Government believes commissions must go. This gives insurers the perfect excuse to severe IFA lifelines. Active member discounts are also to be banned. This means advisers, in theory, have to go back and renegotiate many arrangements with employers.  Given that most insurers face tens of thousands of new auto-enrolments over the coming year, I wouldn’t hold my breath for that to begin any time soon.
So how much of this is ever going to happen? Looking into my crystal ball for 2014, I bet we get a 0.75 per cent cap on future auto-enrolment contributions, but these will be largely tracker and pretty deadly default funds. If you want active management, then you will be able to pay more, under a comply and explain.
As for legacy funds? Not in my lifetime. The past, as they say, is another country, although it does have a way of catching up with you.
Christopher Marlow, who first penned these words, was murdered while out dining in Deptford. Perhaps the future, for both the pensions industry and politicians, will be a case of watching your back.

Teresa Hunter is a freelance journalist