A government advisory body has heavily criticised the Department for Work and Pensions assessment of the impact of a cap on pension charges for schemes under auto-enrolment as not fit for purpose.
In October, ministers proposed implementing caps on charges. These included a limit of 1% of funds under management; a lower charge cap of 0.75% of funds under management; and a two-tier 'comply or explain' cap on workers automatically enrolled in pensions from April next year.
However, the Regulatory Policy Committee, an independent body that provides expert advice on proposed regulations, said the DWP's assessment of the impact of the reform published alongside the consultation failed to adequately demonstrate why a cap on charges would have 'a zero net impact on the pensions industry'.
It said the DWP had failed to identify a number of potential costs associated with a charge cap, including the cost to providers of communicating new charges and the risk that the cap would become a ceiling, with some providers putting prices up rather than down.
The RPC said: 'The transitional costs to businesses for setting up alternative pension provision were not adequately identified.'
It added that it was not clear how the cost per employer was derived. 'The impact assessment should present this information clearly to ensure that the estimates and assumptions can be tested effectively through consultation,' the RPC said.
As a result, the committee gave the consultation a warning 'red' rating.
Responding to the rating, a DWP spokeswoman said: 'We do not agree with this rating, which has no implications either for our proposals or for the consultation process.
'The reason for consulting on a charge cap was to gather evidence about the potential impact of our proposals on savers and the industry. Our final decision will be based on evidence we have received, not on our initial impact assessment.'
But Tom McPhail, head of pensions research at Hargreaves Lansdown an independent financial advisers said the DWP had conducted the consultation too quickly.
He said: 'If the impact assessment figures were wrong then everyone involved in the consultation including employers, pension providers and the DWP's own officials will have to reconsider their conclusions from the consultation.
'This will almost certainly mean a delay in the introduction of any charge cap on pensions, if one is introduced at all,' he added.
