Providers could meet the level of charges specified by the Pensions Commission, but only if there is a clearing house acting as a go between.
Speaking at a pensions briefing hosted by Legal & General and Cass Business School, Adrian Boulding, pensions strategy director at the insurer, revealed the proposed annual management charges of 0.3% could be achieved provided three key conditions are met.
He says the only way providers could meet the target is if the data and the money for contributions are received electronically and the data and money is 100% correct, or as close as it can be, all the time.
But he warns this would not be possible if employers send the contributions direct to providers as there would be too many mistakes and resending of information, so there would need to be a clearing house which could also allow employee choice without extra work for the employer.
In addition he says the clearing house could effectively pay for itself by offering employers the option to do different things to eth standard electronic transfers, such as submitting data by paper, or paying the contributions in cash, which would incur an extra fee.
And although he says the Pensions Regulator will probably be responsible for policing the system to make sure employers and employees are making the correct contributions, he says the day-to-day policing could be down to the clearing house, backed by a system of fines which could go towards its upkeep.
Meanwhile he says the framework of personal accounts will be a result of co-operation between the industry and the government, ending in a tender exercise similar to other Private Finance Initiatives (PFI) where the industry will say they will do A,B, and C, provided the government will do D,E and F.
Boulding says: “This is completely different to previous pension initiatives where the government has come up with the rules but not actually do anything. This time we may see something written into the contracts showing the government is taking a step further this time.”
He suggests some actions the government could take include promoting the scheme, and also possibly underwriting the volumes of business the providers would expect to receive through an auto-enrolled scheme.
But he points out this doesn’t mean the government would guarantee the number of entrants, more that it would guarantee the revenue, so if a provider says it could meet the 0.3% target but only if they make say £1m in revenue, and then they only make £750,000, then the government, under the guarantee, would be obliged to make up the shortfall.
He says providers will need to receive a sustained volume of business through personal accounts to recover their capital expenditure, as he says the monthly amount it could charge a small employer with between 1-4 employees under the 0.3% target, would be just 94p per company, compared to an employer with 50 or more employees where the provider could charge £38.
Boulding says: “The message we are trying to get across to the government is this is incredibly challenging, to try and deliver the schemes we offer today to big companies, to smaller companies and at smaller charges. It means doing things in a very different way, and the clearing house is the magic ingredient.”
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