Excessive fees levied on pensions are set to become the next target in the government’s attack on the cost of living, as it pushes ahead with plans for a cap on charges.
In a move that is supported by the Treasury, the Department for Work and Pensions is to issue a consultation document on Wednesday proposing a basic cap on fees of 0.75 per cent on retirement savings made through the government’s flagship auto-enrolment scheme.
Announcing the move, first disclosed in the Financial Times, Steve Webb, pensions minister, said that if an individual saved £100 a month into a scheme that charged a one per cent fee, this could take about £160,000 out of their pension pot during their working life.
Capping charges on workplace pension schemes at 0.75 per cent would yield an extra £100,000 of pension savings compared with a 1.5 per cent charge, the Treasury said.
In September, an OFT review declined to call for a cap on pension charges. Although the average charge on new pension schemes set up in 2012 is about 0.51 per cent, the Office of Fair Trading estimates that there are over 186,000 pension pots with £2.65bn assets subject to annual charges of above 1 per cent.
However, the DWP document will leave the door open for higher charges, including a proposal for a two-tier “comply or explain” fee structure that would allow fees to go as high as one per cent.
While the move is likely to be welcomed by consumers, it may receive a cooler reception from the financial services industry whose earnings will be hit by the cap.
Will Aitken, a senior consultant at Towers Watson, noted that fund management services could be delivered much more cheaply than levels implied by the cap. “No one should take too much comfort from the fact that their scheme is within this cap: 0.75 per cent is still above the odds for a basic product and a great many large employers’ schemes charge less than this,” he added.
The issue of charges has acquired a sharper political edge following the start of auto-enrolment last year. By 2017, all employers will be required by law to offer staff the chance to join a workplace pension as part of an ambitious push to increase savings rates for lower earners and ease the future burden on the state.
Mr Webb added: “I’m confident that we will make the system fairer for anyone being automatically enrolled into a workplace pension and will finally address the issue of charges which has been neglected for far too long.”
Frances O’Grady, TUC general secretary, described it as “a good initial step” that would “provide reassurance that savers are not being ripped off”.
But she added: “It will be just as important to make sure that there are no charges hidden away in the management of [pension] scheme investments, no charges going as commission to consultants and no hidden penalties for savers who are no longer contributing to the scheme – the so-called active member discounts.”