People taking out a personal pension should receive bank account-style statements to prevent them facing hidden costs according to a report from a think tank.
The analysis from the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) was highly critical of the pensions sector which it says often fails to reveal hidden costs of pensions including commission, transaction and management fees.
Even when costs are declared, it is not done in a way in which many pension savers and small employers are likely to understand, the study said.
It highlighted what it says is the “enormous” impact of fees, where an extra 2 per cent annual charge can, over the lifetime of a pension, result in a halving of pension benefits.
The report, Seeing through the British Pension System, echoes a previous RSA study which found that a large proportion of pensions disappear in fees – with charges swallowing up to 40 per cent of the value of the pension over its lifetime.
The report recommends changes to how consumers are told about the state of their pensions, suggesting that a statement similar to that provided by banks may be a possible solution.
The report’s authors say these statements must be: clear and easy to understand, comprehensive, capable of reconciliation (like a bank statement, the customer should be clear as to how the provider has arrived at the declarations it has made.) It also says such statements should be inexpensive to produce, reducing paperwork to avoid any additional fees.
Otto Thoresen, director general of the Association of British Insurers (ABI), said: “We agree it is desirable that pension costs become more transparent overall, and are keen to look at ideas which make it easier for employees to understand their pensions.
“All employees who have contract-based defined contribution pensions have their charges disclosed in their key facts information when they purchase a pension. This is required by FSA (Financial Services Authority) rules.
“In contrast, there are no disclosure requirements for trust-based schemes. To improve transparency, it would be a good first step if trust-based schemes agreed to start disclosing to FSA standards, so that there is a level playing field.”
The report follows an attack on fees charged by independent financial advisers (IFAs) by the Labour leader Ed Miliband. Mr Miliband suggested a cap should be introduced on pensions charges, a measure which was dismissed by the industry as having a “back of an envelope feel”.