What impact does the auto enrolment charge cap have on business?
A recent survey of independent business owners and managers found 83% would prefer workplace pension charges to be brought under a simple capped, all-in-one fee.
Today, small business owners have to handle not only the day-to-day running of the company, pushing forward business growth and all that that entails, they also have to offer a workplace pension.
Often this is the first time they will have had to confront the business of pensions, even on a personal level, so unpicking the often opaque transaction costs and upfront fees to expose the best deal can add an unhelpful layer of complexity to this new burden. And then they must decipher whether in fact, this adds up to a good deal for themselves and their employees in the longer term.
That’s undoubtedly why an overwhelming majority felt an all-in-one fee would be more workable.
Over the next 12 months, the Pension Regulator expects more than 800,000 small businesses to auto-enrol their staff.
The charge cap is set by Government and applies to general administration and investment costs on employee workplace pensions, while transaction costs from investment trading fall outside the cap - so can be added on.
The survey, conducted on behalf of workplace pension provider Smart Pension, found that 41% of employers admitted the charge cap was difficult to understand, 33% said added costs were harder to budget for and another 31% said they were hard to keep track of.
What the charge cap covers and doesn’t cover is confusing for employers and savers alike and can be costly. In the most extreme cases, transaction costs can eat up over 10% of a first year’s contributions, while front-loaded costs penalise workers who have jobs lasting only a few years.
For example, based on a pot size of £500, with inflation at 2% and growth set at FCA-recommended 5%, under some schemes, the percentage of growth eaten by fees can be as high as 105%.
One thing business owners said they were in favour of was simplifying things. A fixed charge cap, as a single percentage, set at a reasonable level that includes all costs along the way makes perfect sense to these busy owners who are clearly frustrated by the complex charging levels imposed by many providers.
The survey found 53% of small business owners said they felt being able to say the charge cap would always stay the same would be a more effective message. (The responsibility for engagement rests with the employer, and the fine for not doing so is £400.)
The Government is currently considering changes to the charge cap on default funds as part of the current Automatic Enrolment (AE) review. There are suggestions that the charge cap should be lowered from the current 0.75%.
The 0.75% vs 0.50% charge cap debate distracts from the additional fees that many providers are levying, Smart Pension argues. It says the charge cap should not be lowered from the current 0.75% because when you factor in the increased costs of running a scheme following the Pension Schemes Act and the approaching peak of employers there is no logical argument for decreasing it.
What should happen, Smart Pension suggests, is that we do away with confusing additional charges in addition to the percentage fee. All charges should be rolled into a single overall percentage charge cap. This would create full transparency and comparability of costs to employees, and result in much better value for money for members.
Taking this approach would also have an important impact on trust for the industry at a time when the smallest firms are enrolling their staff and the Government is considering extending the success of the initiative to the self-employed. Part of the Review’s remit will be to look at coverage – and whether it is bringing enough people in to save towards their retirement. A complicated and expensive package will detract from the main purpose of auto-enrolment – to help people save for their retirement.
Are pensions causing confusion for your small business? See how Smart Pensions can help your business