Last week, the Pensions Minister, Steve Webb, told the House of Commons that he wanted to “get an iron grip” on pension charges and consequently announced three major changes.
The changes will benefit pension savers, could they push up costs for employers?
First things first, what is changing?
The Government is keen to reduce charges for pension savers and investors, in the belief that lower charges will translate into bigger pension pots at retirement.
As a quick aside, this is broadly true, although savers and investors should never confuse cost for value for money.
Anyway, back to Mr Webb, who announced the following:
- From 2015 the maximum amount a member can be charged for an Automatic Enrolment default fund is 0.75%, per year, of the amount they have invested. This means that for someone with £10,000 in their pension pot, the maximum they could be charged is £75 per year
- From 2016, the payments of commission to financial advisers from older pensions, will be banned
- Also from 2016, the practice of charging active members lower management fees compared those who have left the employment of the company, will be banned
The changes are likely to be good news for members, especially if they are charged less for accessing the default fund, which they probably would have signed up to anyway.
But is it such good news for employers? Could the cost of implementing Automatic Enrolment just be about to rise?
How will these changes affect your business? Will costs increase?
Much depends on which of these three categories you call into:
1. You currently offer a workplace pension but have not yet reached your Staging Date
2. You have already automatically enrolled your staff into a workplace pension
3. You do not currently offer a workplace pension
Let’s deal with each option in turn:
You currently offer a workplace pension but have not yet reached your Staging Date If you were planning to use your existing workplace pension to enrol your staff into you may have to think again.
We have already seen some pension providers refuse to accept additional members who need to be automatically enrolled and these new rules could make it even harder to use the existing pension.
If the option on the existing scheme you planned to use as a default fund, fails to meet the 0.75% charge cap, and an alternative fund can’t be found in the range offered, you will have to select a different pension provider to use for Automatic Enrolment.
Remember too, that as the existing pension will not be a qualifying scheme, members will have to be automatically enrolled into the new scheme, leaving them with two pensions and probably a bunch of questions, which of course they will, at least in the first instance, send in your direction.
There may also be a problem if your adviser is receiving commission on the existing scheme. These payments will stop in 2016 and will mean the adviser will probably have to charge your business a direct fee, if the on-going service to your business and employees is to be maintained.
Both of these issues could leave your business facing additional costs, either in terms of fees or time.
You have already automatically enrolled your staff into a workplace pension The changes could leave you with two main problems.
Firstly, the default fund for the pension you have automatically enrolled your staff into may be more expensive than the 0.75% cap. This problem could potentially be solved by changing the default fund to one with a lower cost, but if one isn’t available a new scheme may have to be considered, which could incur more time and cost.
The second problem could also hit you directly in the pocket.
Up until quite recently advisers were able to take commission from the pension providers they recommended. If the adviser who set up your scheme chose this route, the commission will be ‘switched off’ in 2016, which means they will probably have to charge your business a fee for providing whatever on-going service was agreed.
You do not currently offer a workplace pension The cost of implementing Automatic Enrolment will probably change little for you as a result of these announcements.
The ability to pay for an adviser’s time through commission was removed some time ago and as you have no existing scheme in place you will not be caught by the charge cap.
However, a word of warning.
If you are taking advice then make sure your adviser selects a pension provider which meets the new criteria, not doing so could prove to be an expensive mistake!
Automatic Enrolment is complex, how can Investment Sense help?
With regular changes to the Automatic Enrolment rules we know many employers are concerned about their obligations and we���re here to help.
We’ve developed a four stage process to ensure your business is compliant by your staging date and sticks to the rules in the months and years to come.
- Would like to know your staging date
- Have a question about Automatic Enrolment
- Would like to know how you can comply with the new rules
Then get in touch today, to put it bluntly, this problem isn’t going away and your staging date is only getting closer.
We’re here to help, call us on 0115 933 84330115 933 8433 or email firstname.lastname@example.org