Consultancy charges in automatic enrolment schemes become illegal from tomorrow, and existing auto-enrolment schemes written on the same basis may also be unraveled, the DWP has confirmed.
In May the government announced the results of its review of consultancy charges and its intention to act to crack down on inappropriate charges.
The government says it will now also consult in the autumn over whether it should extend the ban to cover a small number of schemes which already had an agreement in place before 10 May – when pensions minister Steve Webb announced that he intended to ban consultancy charges.
The new law affects defined contribution schemes qualifying for automatic enrolment. It means an employer cannot receive advice under an agreement with a third party, other than a trustee, provider or scheme manager, and pay for that advice out of the members’ pension pots or contributions.
Between November 2012 and May 2013, the government carried out a review of consultancy charges. It says that review found that existing measures to prevent advisers deducting high charges from members’ pension pots were inadequate. It also argued that consultancy charges can have a disproportionately negative impact on people who move jobs regularly.
The DWP says there was widespread support in Parliament for the government’s decision to ban consultancy charging.
Thomsons Online Benefits chief executive Michael Whitfield has attacked the move, arguing it will lead to an increase in auto-enrolment defaults by employers and reduced saving rates over the longer term.
Webb says: “My job is to make sure people get better pensions. So when people put hard-earned cash into a pension I am determined to make sure it doesn’t get gobbled up by charges. This ban will make the system fairer for anyone being automatically enrolled into a workplace pension.”
Whitfield says: “There are two things I would like Mr Webb to remember.
Next year when thousands of employers miss their staging date, and Nest can’t cope with the tsunami of people needing support, he would do well to remember what I predicted earlier in the year about how the corporate adviser applying a fair consultancy charge would deliver to the masses. We have done the numbers using proven delivery methodology. Delivering solutions like AE is all about planning against the available capacity and it is abundantly clear, when you add up the delivery capability of Nest, B&CE, Now! the pensions and payroll providers, and technology providers like Thomsons, that the available supply is woefully inadequate to satisfy the prescribed demand.
“In thirty years time I shall probably be pushing up the daisies but people will look back on AE as a poorly planned, poorly delivered and overly complex solution that failed, leaving the vast majority of older people with insufficient incomes in retirement. Of course by then we will have compulsory employer contributions of 10 per cent and a state retirement date of 70 which should help take people’s minds off it. That will be Steve Webb’s legacy.”