Summary of reform: 0.75 percent charge cap- won’t address £30bn ‘at risk’ assets in legacy schemes, identified by the OFT. It will mean defaults are now passive tracker funds for all but the largest schemes. NEST- has effectively been exempted from the charge cap by DWP edict. Ban on commission- is likely to lead employers to reassess their auto-enrolment schemes.

[body] Further detail includes a ban on Active Member Discounts- will lead to a more open and honest presentation of scheme charges. Minimum Quality Standards- will hopefully lead to greater focus on pension fund performance; 0.75 percent cap on charges from April 2015; Applies to default funds in DC qualifying schemes; Applies to all member-borne deductions (MBDs); BUT- excludes transaction costs. Laith Khalaf, Head of Corporate Research at Hargreaves Lansdowne: “These measures should serve to give savers greater confidence to invest in a pension, which combined with the greater flexibility introduced last week will lead to more people saving for retirement. However, they do not address the £30 billion of savers’ money in legacy pension schemes which the OFT identified as being the most at risk of being poor value for money. It is also important for employers to recognise that a cheap fund is not necessarily a good fund, in fact for all but the biggest employers it will be a passive fund. If employers want to offer quality active funds to their staff, this will now need to be done as a self-select option outside of the default, with the appropriate level of signposting so members can make an informed choice.”

 NEST
Because of the contribution structure of NEST (1.8 percent contribution charge and 0.3 percent annual charge), those joining with less than 7 years to retirement stand to pay more than 0.75 percent in charges. However the government has effectively issued a separate charge cap for schemes with this sort of dual charge structure. It has issued a matrix of equivalences between dual-charge structures and standard annual management fees, based on an average of 10 investor profiles, some examples below: 1.5 percent contribution + 0.3 percent AMC = 0.46 percent; 2 percent contribution + 0.3 percent AMC = 0.52 percent and 2 percent contribution + 0.5 percent AMC = 0.72 percent

 The upshot of this is NEST is conveniently compliant in the face of the charge cap, despite the fact some members will pay more than 0.75 percent per annum. Laith Khalaf, Head of Corporate Research: “This is a bit of a fudge, to say the least. On the one hand the DWP is claiming that people paying more than 0.75 percent are being ripped off, while at the same time ushering them into a scheme where some will pay more than that. The government is effectively exempting NEST by edict, without resolving this incoherence. Many employers used their existing schemes for auto-enrolment because insurance companies paid commission to their adviser, and if they had switched schemes they would have had to pay fees themselves. They will now have to do that anyway, which will lead them to reassess the actual quality of their pension scheme, and the value of the services which their adviser is providing. We expect this measure to prompt many companies to review their pension scheme before the ban comes in, at which point they will have to start paying fees to their adviser.”

Ban on Active Member Discounts (AMDs)
From April 2015, the 0.75 percent cap will apply to both active and deferred members of the default fund. From April 2016 AMDs will be banned completely, even if both charges for active and deferred members fall under the 0.75 percent cap. Laith Khalaf, Head of Corporate Research: “Active member discounts have been used for years to cut the apparent cost of a pension scheme, but were really just sleight of hand on the part of insurance company actuaries. Banning these charging structures will lead to a more honest presentation of the charges members will pay.”

Quality Standards in Workplace Pension Schemes
The government is also going to introduce minimum quality standards for workplace pension schemes, which will become effective from April 2015. In particular it will look to introduce a requirement for all providers to have a governance committee in place to look out for members’ interests. Laith Khalaf, Head of Corporate Research: “These DWP standards are designed to improve the governance of workplace pension schemes, which is a rising priority in the mind of many employers, particularly as the dust of auto-enrolment begins to clear. Pension fund performance in particular is an area which has been neglected for too long, and needs to be brought under the spotlight.”