New pensions charges scandal looms

date: 30 July 2012

embargo: For immediate release

The TUC is today (Monday) calling on the government to ban employers from passing on the costs of taking advice from consultants on the implementation of their new legal duty to automatically enrol staff in a pension to staff pension pots.

The largest employers need to start enrolling staff from this autumn, with other employers following in a phased programme finishing with the smallest employers in 2016. Many employers are seeking help from outside consultants to ensure that they are meeting their new pension duties.

Large employers appear to be absorbing the costs of outside help, but some medium and small employers are planning to recoup the costs of outside consultancy from pension contributions - an additional charge on top of those already levied by pension providers.

This practice, known as consultancy charging in the pensions world, is legal but in a letter to pensions minister Steve Webb the TUC is calling on him to use his powers to cap charges in pension schemes to outlaw consultancy charging.

The Department for Work and Pensions (DWP) recently confirmed the compatibility of consultancy charging and automatic enrolment, following confusing guidance issued by the Financial Services Authority (FSA).

The FSA had suggested that fees for advice taken out of pension contributions could lead to employers failing to satisfy rules on minimum contribution rates. Non compliance with these rules can lead to a series of fines from the Pensions Regulator.

However, the DWP subsequently explained that this only applies where fees are paid before contributions enter an individual's pension pot - and therefore consultancy charging is lawful if fees are paid after contributions have entered the pension scheme. Whether or not staff will appreciate this distinction is highly debatable, says the TUC.

TUC General Secretary Brendan Barber said: 'It is completely wrong that staff who pay in auto-enrolment pensions should have to meet the employer's costs of making sure that they obey the law. This is a cost that should fall on the business as a whole.

'Particularly in low-paid sectors where staff change job frequently, those unlucky enough to work for employers using consultancy charging could find a big chunk of their pension going to consultants, rather than to provide retirement income.'

'Auto-enrolment is a huge advance and the TUC is a strong supporter, but we worry that consultancy charging will sour its introduction. We applaud pension schemes such as NEST who have said that they will not implement consultancy charging.'

NOTES TO EDITORS:

Full text of letter to Pensions Minister Steve Webb

The TUC welcomes your recent statements on defined contribution pension charges. Ensuring that charges in workplace pension schemes are low will be an essential ingredient of the successful introduction of automatic enrolment.

In particular, we welcome your willingness to cap charges in the event that the pensions industry fails to deliver consistently low charges.

However, we believe that the government must go further on one type of charge, that is, consultancy charging. We believe that it must be made unlawful to reclaim consultancy charges from an employee's pension pot if we are to restore trust in pension saving and ensure adequate contributions into workplace pension schemes. Consultancy charging - most likely to apply when medium-sized companies automatically enrol - could well provide a damaging reputational hit on the whole pensions programme as well as have an unfair impact on the individuals concerned.

We acknowledge that capping charges is not a straightforward matter. There is a risk that the cap leads to charges being levelled upwards. There is also disagreement among stakeholders over what constitutes a charge. For this reason, we believe that the best course of action, in the first instance, would be to make unlawful certain forms of charges while more generally mandating greater transparency on charges and continuing to monitor fee levels.

The Retail Distribution Review has resolved the conflict of interest arising from financial advisers being paid commission by the firms whose products they recommend. But is has not addressed another potential market distortion: through consultancy charging, employees will be compelled to pay for advice provided exclusively to their employer. The employer who receives the advice will have no direct interest in ensuring that advice fees are not excessive. Nor will the employee derive any pension benefit from paying this charge out of their pension pot.

Further, it is inappropriate that the advice to the employer should only be paid by employees saving in a pension. This is advice to the employer - much of it to do with making sure that they are compliant with the law. That is a cost that should fall on the business - not a section of the workforce.

We welcome your department's recent clarification of the rules on consultancy charging; we agree that taking any charge out of a member's pot before it is paid into their pension scheme would contravene the minimum legal contributions required as part of automatic enrolment. The Financial Services Authority's statement that a consultancy charge would not be permitted if it reduced contributions below the legal minimum was unnecessarily confusing, and underlines the discrepancies in the regulatory system for contract-based defined contribution provision highlighted by the National Audit Office's recent inquiry.

The point we would underline is that it is not the member who benefits from the advice, and therefore any fees paid by employees for advice provided exclusively to their employer, even if taken out of contributions once they have entered the pension scheme, should be considered to contravene the rules on minimum legal contributions.

We are also concerned that the code of conduct on transparency on charges being developed by the NAPF, with the support of the working group upon which the TUC is represented, will not compel the disclosure of simple illustrations of the impact of all charges on individuals' pension pots. In these circumstances, it is possible that employers will not even be made fully aware by advisers of the conflict of interest arising from consultancy charging. Furthermore, the code is designed to achieve transparency for only employers; employees will have few rights to a clear illustration of the charges they are paying and the impact on their pension pot.

We look forward to working closely with your department on this important issue.

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