The charge cap: to be or not to be, that is the question?

Today’s announcement from Steve Webb about the potential pension charge cap had half the pension commentators cheering and the other half tearing their hair out.

After asking last Autumn for the fastest consultation period possible, today Webb confirmed the decision on the charge cap has been delayed. Instead he wants the cap to come in by April 2015 (and not April 2014 as previously mooted), and said he will give employers at least 12 months’ notice. The reason for the delay? He was worried about the amount of time employers would have to make changes to their schemes.

This policy is Steve Webb’s baby. His great legacy of this coalition parliament. So, to delay it means it was either a massive victory for industry lobbying or he came under some very uncomfortable pressure from the Treasury. Or both.

Webb definitely wants a charge cap. Although it was headed up as a ‘consultation’ there’s little doubt, despite the OFT’s view, Webb was always going to introduce a cap. We can now expect a paper next month, and Webb’s intention is to introduce the charge cap by April 2015. The problem with Webb’s plans is we need the cap in legislation, and with a general election in May 2015, there’s a real possibility this might get caught up in a legislative traffic jam as the coalition government tries to pass all the remaining legislation milling around as the clock ticks down. And whilst we know this policy is important to Webb, it may not be as important to the rest of Government. Including, significantly, the Treasury.

We do know the cap’s going to apply to all qualifying pension schemes – in other words ones being used to automatically enrol people, or those where the members are people who would otherwise qualify for automatic enrolment. We also (probably) know that active member discounts will go, and will have to be unwound for any scheme set on that basis.

What we don’t know is the level of any charge cap. It’s very unlikely to be above 1%, and much more likely to be 0.75% or 0.5%. And we don’t know what charges the charge cap will cover. Although the talk was of AMC, several have lobbied for all charges to be included including all the pesky fund charges (even the known unknowns and the unknown unknowns – to sort of quote Donald Rumsfeld). And we don’t know what will happen about schemes previously set up on a commission basis.

So, what can we do now? Well, avoid AMDs to start off with. They will only cause problems later on. Only set up schemes with probably at most a 0.75% charge – if that’s possible – to err on the side of caution. And start to look very closely at existing schemes being used to harbour potential automatic enrolment employees. If they are on an ‘old’ basis, they will need to be unwound or shifted, and we may have about a year to April 2015 to take action. But groundwork can be made now.

The charge cap is not yet home and dry. There is still a significant possibility it could be kicked into the legislative long grass. Webb wants qualifying schemes to be pristine clean with low charges and no fiddly AMDs. And the ironic thing is even though he has faffed around with this policy, employers, providers and advisers have all started making the changes necessary for the introduction of the cap. So we could end up with the peculiar position of no charge cap in legislation, but a charge cap in practice.