Robin Hames looks at consultancy charging, charge caps and auto-enrolment

The initials ‘CC’ featured prominently in the statement issued by the Pensions Minister on 10 May.

The statement confirmed what many of us had already believed – that ‘consultancy charging’ had no place in the world of auto-enrolment. It also revisited the issue of whether a ‘charge cap’ should be put in place for auto-enrolment schemes.

Consultancy charging was always a flawed premise. Introduced by the Financial Services Authority as part of its Retail Distribution Review as a replacement for commission, it could rightly lay claim to providing greater clarity as to who exactly was paying for what but unfortunately the price for this clarity was rather high and paid exclusively by the member.

Consultancy charging deducts the cost of advice immediately from the member’s fund rather than stretching payment over a number of years through an increased annual management charge, as was the case with commission. While this clearly demonstrates the cost being borne by the member for the advice taken by their employer, its impact is highly detrimental for those individuals who only remain members for a short time.

For many people who move regularly from job to job, there was a significant danger of them being hit by initial set up charges time and time again.

Sense has prevailed with the ban on consultancy charging and we should now have a position where if an employer or trustee wishes to take advice on auto-enrolment, the cost of that advice cannot be levied on the member.

In fact, following this decision, there is only one scheme proposition in the market which will, as a matter of course, levy an initial charge on contributions: Nest.

As early as June last year, the Financial Services Authority, stated that consultancy charging was inappropriate if it reduced ‘net’ contributions below the minimum level required for qualifying purposes. And yet, it could be argued that this is also precisely what the initial charge levied by Nest also does.

So while we endorse the decision to ban consultancy charging for auto-enrolment schemes and support the real need for Nest in the marketplace, the outcome of this review does seem somewhat ironic.

Also contained within the statement was affirmation that there will be serious consideration given to applying a cap on the charge which can be levied on auto-enrolment schemes.

Unsurprisingly, the champions of Group SIPP arrangements have been quick to lobby that such a charge cap only covers the scheme’s default fund rather than all the fund choices available to members under their offerings.

Charging caps have actually been rather effective in the DC marketplace. For all its faults and failings, the 1 per cent cap introduced through the stakeholder legislation undoubtedly drove down costs in the bundled DC market.

However the initial charge applied to contributions into Nest does again rather muddy the water when considering a charge cap. Should it be included in the calculation of the overall effective deduction being made? It would seem logical to do so.

But if it is included, its impact varies greatly depending on the timeframe of contributions being paid. In its own review of its charging structure, Nest acknowledges that older savers or those who only save for a short period may be worse off due to its combination of charges.

Presumably to resolve this conundrum, it will be necessary to consider the impact of a scheme’s costs for an ‘average’ saver when setting a maximum acceptable level of charge.

The argument that the initial charge for Nest could be excluded as it is only temporary would carry greater weight were it not for the fact that ‘temporary’ is estimated to be 20 years.

Indeed, if the initial charge were to be excluded from the price cap, this would presumably lead to a rise in combination charging in the market which would again be rather counter-intuitive. Clarity is the watchword and a return to more complex charging structures is not a desirable outcome.

If nothing else this all serves to demonstrate how complex effective regulation of the DC market can be – especially the bundled DC market where administration, fund management and other costs are all wrapped together.

With so much of the auto-enrolment experiment currently exceeding expectations, it may seem churlish to be picking at such matters but as staging dates progress and more and more smaller employers enter the fold, it is only right to continue to pursue the best possible legislation and regulation to create the most receptive environment for good member outcomes.

Robin Hames is head of marketing at Capita Employee Benefits

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