Oct 30 2013
Government plans to impose a cap on pension charges as part of a crackdown on "rip off" fees which can shrink the size of someone's retirement pot by thousands of pounds have been welcomed by employers and consumer campaigners.
A consultation proposes to ban providers from setting their charge for managing a pension pot above 0.75% a year amid fears that savers are at risk of being placed in poor value schemes as landmark reforms to encourage workers to start putting money towards their retirement roll out.
The Government proposes specifying a "broad definition" of charges, to prevent providers from hiding their fees outside any cap.
It said it wants to stamp out any bad practice which could "undermine trust in the system".
The Government is also considering halting a practice known as "active member discounts", whereby people who have stopped paying into a pension, perhaps because they have changed jobs, see the charges for running their pot go up.
The Office of Fair Trading (OFT) recently found that pension savers typically see their annual charge hiked by around half a percentage point under this system.
Even adding a fraction of a percentage point to an annual charge can wipe tens of thousands of pounds off the eventual size of the pension someone will end up with.
The Government said that someone who saves £100 a month over a typical working lifetime of 46 years could lose almost £170,000 from their pension pot with a 1% charge and over £230,000 with a 1.5% charge.
A pension saver with a 0.75% annual charge on their pension pot could eventually end up £100,000 better off than if they had been charged a rate of 1.5%, the Government said.
Other options for caps being considered by the Government include a higher charge cap of 1% and a "two-tier" cap. The two-tier cap would involve a standard cap of 0.75% and as well as a higher cap of 1% if employers explain to the Pensions Regulator why their scheme charges more than 0.75%.
Any final cap could lie somewhere between the two levels suggested.
Up to nine million people will eventually be newly saving into a pension or saving more under automatic enrolment, which will increase the amount being saved in to workplace pensions by around £11 billion per year.
More than 1.7 million people have been placed into pension schemes so far under the reforms, which started last year with bigger firms and a higher-than-expected nine out of 10 people so far are staying in their pension rather than opting out.
Which? executive director Richard Lloyd said: "We welcome plans to cap charges on workplace pensions, but the Government must take this opportunity to really scrutinise the market to see if the proposed cap could be set any lower ."
Neil Carberry, CBI director of employment and skills, said firms want to see clearer charges so they can choose a good deal for their staff.
He said a cap for automatic enrolment schemes "may be helpful if it is set at the right level".
Independent pensions expert and former Downing Street adviser Ros Altmann also welcomed the moves. But she urged the Government to also improve transparency over what happens when people approaching retirement want to convert their pension pot into a fixed retirement income by buying an annuity.
She said: "Buying the wrong annuity can be even more damaging to people's pension funds than being in a higher-charging scheme."
In the Government's consultation document, Pensions Minister Steve Webb raised concerns that there is a "real risk" that smaller employers will struggle to negotiate the same low charges from pension providers that larger employers have been able to, or that they will use high-charging older pension schemes. Charges in schemes set up before 2001 are around 26% higher than those set up since.
The document said that different charging structures used by providers make it hard to compare schemes, causing problems for employers trying to shop around.
It suggested that making providers display their charges as one single figure could help boost competition and a regulatory body could also publish a regularly-updated table of charges to make comparisons easier.
Pensions Minister Steve Webb said: "The Government believes that enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges."
The consultation will run until November 28 and the finalised plans will be put into place next year.
Financial Secretary to the Treasury, Sajid Javid, said: "The Government is determined to help hard working families and that includes making sure someone's saving will deliver the biggest possible returns and not be eaten away at by a variety of charges and fees."
Otto Thoresen, director general of the Association of British Insurers (ABI), said the industry recognises concerns over pension charges, which are at their lowest ever average levels.
He said: "It is important that any cap doesn't have the effect of levelling charges up."