30 Oct 2013

Cap on pension charges proposed to help savers

The government is proposing a cap on “excessive” pension charges, which would put tens of thousands of pounds back into retirement savings pots.

A ban on all charges above 0.75 per cent a year is among the options put forward in a consultation being launched to help give savers confidence that they are getting good value for money.

The proposal is part of the Department of Work and Pension‘s landmark reforms to automatically place people into workplace pensions, and would only apply to those on workplace pension schemes introduced last year.

The industry has been working to improve transparency and the average charge on new pension schemes set up in 2012 is around 0.51 per cent.

But the Office of Fair Trading (OFT) estimates that there are more than 186,000 pension pots with £2.65bn worth of assets which are subject to an annual charge of above 1 per cent.

Up to 9 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 £11bn per year.

‘Enough is enough’

Pensions Minister Steve Webb said that small variations in charges can make huge differences over time to the eventual size of the pension pot that someone ends up with: 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 per cent charge and over £230,000 with a 1.5 per cent charge.

A pension saver with a 0.75 per cent 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 per cent, the government said.

People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges – Steve Webb

Mr 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.”

Other options for caps being considered by the government include a higher charge cap of 1 per cent and a “two-tier” cap. Any final cap could lie somewhere between the two levels suggested, depending on the evidence received.

The OFT called for a tougher clampdown on charges in a report last month, which warned that “most employees do not engage with, or understand their pensions”, but it stopped short of recommending a cap on charges, raising concerns about how costs would be defined and also that providers may see a cap as a target.

Otto Thoresen, director general of the Association of British Insurers (ABI), said: “It is important that any cap doesn’t have the effect of levelling charges up. The Office of Fair Trading raised a number of concerns about this when deciding not to recommend a cap in its recent study of workplace pensions.

“The detail around what is included in the charge definition will be crucial, as is the need to recognise that other factors contribute to customers receiving value for money. The industry is committed to making pension reform a success and of course will engage fully with this consultation.”