Pensions regulator warns of ‘race to bottom’ over charges cap

The Pensions Regulator has expressed deep reservations about plans to cap charges related to workplace pensions, saying it does not want to see “a race to the bottom”.

But some of the biggest pension managers have said they are unconcerned and that it will have little impact on them.

Last month, the government said it was bringing forward “radical reforms” to pension charges and that a cap “was an excellent way” of reducing costs for savers.

Under the proposals, charges of more than 0.75 per cent could be banned for savers automatically enrolled in a workplace pension, unless an employer could justify the higher fees to the regulator.

But in an interview with the FT, Andrew Warwick-Thompson said the regulator, whose duty is to protect the interests of workplace pension savers, did not believe a cap would “necessarily deliver value for members”.

“Value for money is not just about low cost,” said Mr Warwick-Thompson, the regulator’s executive director for defined contribution, governance and administration.

“You can have low cost with absolutely abysmal member service. You can have high charges but with absolutely superlative service to members, and I would regard that as good value for money.”

However, some of the biggest investment groups, which manage billions of pounds in pension money, back the proposed 0.75 per cent cap, saying it will have little impact on them as their charges are much lower.

The head of equity at one of the UK’s biggest listed asset management groups said: “The cap is a good thing, as it stops people being charged very high fees, but we charge about 0.4 per cent for the pension schemes we manage. We are competitive, but not especially low.”

An equity portfolio manager at another big UK group said: “Our charges are much lower than 0.75 per cent. I think most big groups offer much lower charges than that. A company or individual looking for a pension would not have much problem finding a scheme with fees lower than 0.75 per cent. I agree with the cap, but in practice it will not affect the big groups that offer the best deals.”

Mr Warwick-Thompson said he worried a cap would lead to “a race to the bottom on charges, because I don’t necessarily believe that is going to deliver value to the membership.”

Mr Warwick-Thompson’s comments echoed concerns raised by the Office of Fair Trading, which recommended against a cap in a recent report, saying there was a risk it could create “unintended consequences.”

However, Steve Webb, the pensions minister, pressed ahead nonetheless with a consultation, which ends in a fortnight.

Mr Webb’s concerns are for workers at small businesses, who may face higher charges than those in bigger ones that can secure better terms.

Mr Warwick-Thompson said one of his major concerns about a cap was “the skill and the propensity of the financial services industry of finding ways of hiding their costs and charges”.

He also said he worried that imposing a cap “would deliver a very unsustainable business model to the providers of those schemes”.

The Association of British Insurers has said the industry “recognises the concern about charges” but said they are “at their lowest ever average level of 0.52%”.

The Regulator also weighed into a political debate about whether fund mangers should be forced to fully disclose all investment costs charged to pension savers.

“The problem that we have is the reluctance of the retail market to come up with transparency about those costs and charges,” said Mr Warwick-Thompson.

He said tougher measures were needed to deal with the growing problem of “pension liberation”, where individuals are mislead by fraudsters into accessing their funds before the minimum retirement age of 55, exposing them to potentially very large tax charges.

So far, the government says about £420m has been “liberated”, but Mr Warwick-Thompson estimates the true figure may be twice as large, because people who liberate their pension money “have a vested interest in keeping quiet”.

“If I had to put a number on it, I would probably say somewhere around £700m-£1bn,” he said.

Additional reporting by Norma Cohen

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