Check your provider won’t desert you post charge cap – Towers

Employers with schemes likely to be hit by the charge cap should speak to providers now to make sure will offer them a scheme on different terms says Towers Watson.

The consultancy has warned that employers due to start auto-enrolment in or shortly after April 2014 should make contingency plans as a matter off urgency.

Towers Watson says it is unlikely the Government will make clear what the charge cap will actually be until early in the new year.

That means employers with between 90 and 249 staff, who have been told they will be required to stage in April and May 2014 under the new cap, will have to plan for imminent changes without actually knowing what the charge cap will be. But with providers’ resources likely to be stretched offering new terms to thousands of employers and possibly having to reprice 100,000 other schemes should commission and AMDs be abolished, employers need to act quickly to ensure they understand whether they will be offered a new deal or not.

The consultation paper published by the Department for Work and Pensions includes options for capping charges at 0.75 per cent of funds under management and for a 1.0 per cent cap, but does not completely rule out setting the cap at a different level. It also asks what should be within the scope of the cap and discusses banning schemes with active member discounts, or those that pay commission to advisers, from being used for automatic enrolment.

Towers Watson senior consultant Will Aitken says: “Employers will be held responsible if they do not have a compliant scheme, so they are going to need to play it safe. If an employer was planning to enrol employers into an existing scheme with a 0.8 per cent charge, crossing its fingers and hoping that the Government allows this will leave them with a race against the clock if the decision goes the other way. Nor can employers take too much comfort from a headline charge that is slightly below 0.75 per cent until we know what counts towards the charges that are going to be capped. 

“Many medium-sized firms will have negotiated charges that are low enough to leave them feeling reasonably confident. However, where charges look borderline or include active member discounts, firms should talk to their providers now and understand what would happen if the arrangements they have agreed fall foul of the new rules.  For example, will the provider walk away and leave them to find a new scheme from scratch or charge the employer separately for any add-on services it supplies? 

“Unfortunately for affected employers, they may have to compete for providers’ attention. Providers will simultaneously be quoting for smaller employers’ business and chewing over how they would re-price the 100,000 or so existing schemes that pay commission and/or apply active member discounts if these arrangements are outlawed.

“Pension charges is an issue that has been simmering for a long time. Those firms standing in the worst possible place when it boiled over are going to have to act quickly to clear up the mess it has made of their automatic enrolment plans.”