Pensions with consultancy charges that take 100 per cent of an employee’s first year’s contributions can be qualifying schemes for auto-enrolment purposes, the Department for Work and Pensions has confirmed.
The confirmation quashes concerns that consultancy charges that take substantial proportions of employees’ contributions could fall foul of DWP rules designed to prevent advisers encouraging members to opt out.
Under consultancy charging, the new system for remuneration to be introduced from 2013 under the RDR as an alternative to commission, advisers who set up and administer pension schemes will be allowed to deduct their fees from employees’ premiums to pay for the advice, communication packages and set-up costs of arranging these schemes.
The Consultancy Charging Working Party, facilitated by the FSA, published a report into how the new system might work. Its guidelines show no limits on the amounts that can be deducted from employees’ premiums to pay for the pension adviser’s services.
Industry estimates put the cost of this advice at between £250 and £500 per member. For someone on £15,000 a year that would mean their entire first year’s premiums could be deducted to pay the pension adviser’s charges.
Some pensions professionals have expressed concerns that such deductions could lead to schemes becoming non-qualifying.
Asked whether a 100 per cent of first year contributions consultancy charge would preclude a scheme from satisfying auto-enrolment requirements, a DWP spokesman said: “We estimate that the vast majority of employers will use an existing scheme or Nest to fulfil their automatic enrolment duties.
“A scheme which allows deductions from a member’s pot may still satisfy the requirements for automatic enrolment. However, employers will have a number of options to comply which may not incur additional independent financial advice, including using an existing pension scheme, adapting an existing scheme, or using Nest.
“We will be monitoring the impact of automatic enrolment, including how employers are meeting their new duty and the costs involved.”