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Employers may face extra costs over pension cap charges

The financial impact of pension cap charges on employers and the pensions industry may be significantly higher than first thought, according to pensions experts Hargreaves Lansdown.

In the Budget earlier this year George Osborne announced a charge cap on commission payments of 0.75% for all pensions schemes. The cap is intended to reduce the amount scheme members pay to third parties and increase the total in their pot.

The Department for Work and Pensions (DWP) issued figures at the time estimating the change in legislation would cost the pensions industry £195 million.

Recently two of the largest providers, Standard Life and Scottish Widows, announced they have put aside £260 million to cover the charges between them. This suggests the cost to the whole industry will be much higher than the original DWP prediction.

This increased cost will also spread to employers, according to Hargreaves Lansdown head of pensions research Tom McPhail.

“Employers will no longer be able to enjoy the support of advisers paid for by commission,” he said. “These businesses will either have to pay a fee for the support services that they used to get from commission-paid advisers or move their scheme elsewhere.”

McPhail added that the overall disruption caused by a cap on charges will be “far greater” than first anticipated.

“We’re going to see market participants dropping out, possibly within only a year or two of putting an auto-enrolment solution in place,” he said. “It is inevitable that in some cases, particularly for medium-sized employers, additional fees will have to be paid to cover the cost of this work.”