The government's proposed cap on charges in workplace pension default will do some good and some harm, according to Towers Watson.
John Ball, UK head of Pensions at Towers Watson, said: "Just over a week ago, people could say that they didn't want to save more in pensions because the charges were sky-high and they did not want to buy an annuity. Now, the government can claim that it has cleared financial services professionals out of the Lamborghini showrooms to make room for pensioners.
"If you work for a large employer, the chances are that you have been paying comfortably below 0.75 per cent in any case. If a charge cap makes any difference to these schemes, it may even increase charges very slightly – for example, because information will have to be collected in different ways or because pension providers must hold more capital.
"0.75% is far too much to be paying for a basic product. Schemes with charges above this level fall into two categories – those whose pension provider needed to recover high distribution costs and those where the trustees have concluded that more diverse investments give a better trade-off between risk and return.
"Unfortunately, the cap makes no distinction between the two groups – it only looks at what people are paying and not at what they are getting for their money. Indeed, in allowing commission to be paid to advisers when new savers are automatically enrolled into pensions during the next two years, the Government appears content to allow some people's charges to be closer to 0.75% than they would otherwise have to be.
"No one should be forced to invest in a fund with high charges, but capping the default fund goes further than giving everyone the right to access a cheap fund. Having said that all schemes should be overseen by people who put members' interests first, it appears that the Government does not trust fiduciaries to decide what is worth paying for when designing the default fund. The cap could also distort investment decisions. For example, the cost of running a public company detracts from shareholders' returns but is not a charge, whereas the cost of running a property fund will be treated as a charge.
"The Government has thought about how to apply the cap to contribution charges and has come up with the answer that NEST first thought of – that its charges are equivalent to 0.5 per cent of fund value. The actual answer will vary hugely with the age of each employer's workers and with how long they are expected to save for.
"Defined contribution schemes and pension providers have an unprecedented 'to do' list for the next year. Some providers will have to introduce governance committees, start to serve small employers and revisit charges in existing schemes at the same time as working out how they will offer guidance at the point of retirement."