The OFT’s silence on a charge cap is an opportunity missed says Teresa Hunter
So what’s so wrong with a 1 per cent charge cap? In fact 1 per cent is far too high. So why did watchdogs at the Office of Fair Trading shy away from such a generous ceiling? According to its own report, a 1 per cent cap will reduce by 21 per cent typical workplace savings over 40 years.
I was about to rant and rave over why the industry needs to cream off more than a fifth of workers hard-earned savings for itself, when I came across some guidance on dealing with nervous watchdogs on the internet.
Apparently, it is important to never tell your watchdog off in public. Raising your voice or getting cross will only make the little fellow more nervous.
But when you think that a cap of even 0.5 per cent would still cut pensions by 11 per cent, it is hard to understand why the OFT found 1 per cent so unpalatable. Hard that is, until we consider, for all the wonderful numbers, graphs and charts in its report, what was left out.
For example, the OFT acerbically points out that the annual management charge (AMC) does not cover a whole range of extras, such as investment expenses, admin fees and adviser commission. Older contracts levy even more.
So what would a typical AMC be if these were all included? As high as 2 per cent, or 3 per cent? I have no idea. The report doesn’t say. But could the chatter be right? Might it not be, that if some companies were forced to limit their total take to a maximum1 per cent, they might go bust. And when the OFT looked that fact full in the face, it suffered an attack of the heebee geebees.
This isn’t good enough, when nearly 200,000 policies pay AMCs of more than 1 per cent with the highest 2.3 per cent. At this level, providers are swallowing more than 40 per cent of the final pot, and the income at retirement will be more than halved.
But, as I say, we are definitely not going to get cross. Apparently, fretful mutts need time and space to make new friends and over-come their angst.
This must be where the committees come in. Rather than a simple price cap the OFT opted for an audit of all legacy contracts, so that any with eye-watering charges could be moved onto a cheaper deal. This will be overseen by top dogs from the OFT, DWP, and industry, which will involve much chewing over old bones together.
Insurers must also set up governance committees, to monitor the charges being applied to occupational defined contribution schemes.
All fine and dandy. But exercises aimed at bringing the industry to heel and showing who is boss will take time, probably years. Meanwhile, high charges are here to stay and many millions of ordinary workers will be auto-enrolled into expensive contracts.
For once, I doubt advisers can be blamed. Having read the OFT report, it would be hard to recommend the sale of a new scheme into a high priced structure.
Companies though may have fewer reservations. The sort of employers who have previously not thought it essential to offer a quality pension to the bulk of staff are unlikely to suffer many qualms. Forced against their will to enrol all staff into a pension, some will not hesitate to dust down an old scheme set up some years ago, and add a few more names.
All of which puts the Government in a tricky position. Ministers know low contribution rates and high charges will undermine auto-enrolment and guarantee it ends in scandal. They would like to increase contributions but know that would be unwise before sorting out the charging structure. But in shying away from the price cap, the OFT has tied their hands.
Banning active member discounts is welcome, but only provided charges paid by leavers are reduced to that of existing employees. Here corporate advisers can play a role, by threatening to recommend schemes are moved to cheaper competitors.
As a piece of analysis, the OFT’s report into workplace pensions was superb. But its conclusions were weak.
Industry contacts assure me that as a result charges will come down. Maybe.
But I still think Pensions Minister Steve Webb will be barking if he turns his back on a price cap, when he begins his pensions consultation in the autumn.