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If the cap fits!

Not all caps are good for you

Not all caps are good for you

Let’s face it, caps don’t suit everyone.  It’s a message that has been taken up by The Pensions Regulator (tPR) who have recently expressed some concerns about proposals to cap charges related to workplace pensions.  The idea of a cap has come about because of automatic enrolment.  With millions more people being automatically enrolled into workplace pensions, and most of these going into defined contribution arrangements, concern has been expressed that these defined contribution arrangements are not currently delivering adequate pensions.

Outcomes from defined contribution pension arrangements depend on a lot of factors, some of them are: the amount both the member and employer pay in, the returns achieved, the age the member retires, the life expectancy of the member, annuity rates at retirement and, of course, the amount of the charges that providers have deducted over the years.

One way the Government is looking to increase the amount of pension a person receives from a defined contribution arrangement is to cap the charges providers can charge especially for automatic enrolment schemes.  But, as I have been saying for some time, charges are just one factor and capping charges in isolation is wrong, and will probably make an insignificant amount of difference – although it might be a good populist policy ahead of the next election.

tPR’s Andrew Warwick-Thompson recently, quite rightly said: “Value for money is not about low cost.  You can have low cost with absolutely abysmal member service.  You can have high charges but with absolutely superlative service to members and I would regard that as good value for money.”

I couldn’t agree more but I am not sure the message is getting through to politicians. Don’t look at the charges in isolation, look at the gap between the charges and the return on your pension pot. 1% charges with a 2% return is worse than 2% charges with a 6% return.  Forcing down the charges alone could well result  in some providers lowering their service and returns on defined contribution schemes falling not increasing.

I am a firm advocate of transparency of charges (as I believe is the Regulator), but not capping them.  Why should providers not be able to charge more if they can justify it, so long as you know what the costs are and agree to them with your eyes open? Taking a pop at “nasty” insurance companies might buy votes but is unlikely to buy you more pension.

Having a cap forced on you might not be in your best interest!


Fraser Smart
Managing Director, Europe
Buck Consultants

The views on this post are my own and don’t necessarily represent Buck’s positions, strategies, or opinions.

  • I totally agree with this article. Forcing charges down should not be the concern of regulation. Instead, it is more optimal to ensure a transparent market with perfect information so that prices simply go down due to competition as Trustees shop around for best value service.

    Great article once again!!

    posted by: Thomas Sithole - November 29th, 2013 at 11:32 am - 

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