30 October 2013
Last updated at 03:03 ET
Fees can reduce pension pots by tens of thousands of pounds
Management fees charged by pension providers could be capped between 0.75% and 1%, according to proposals being set out by the government.
The Treasury is consulting on its plans to cap fees, which it says could save people tens of thousands of pounds.
Some older schemes set up more than a decade ago have been found to charge up to 2.3% a year in management fees.
On Tuesday pensions minister Steve Webb said the government would launch a “full frontal assault” on pension fees.
The consultation will seek industry input on three possible options: a 1% cap, a 0.75% cap, or a two-tier “comply or explain” cap, where pension providers will be capped at 0.75%, rising to 1% if they can explain to regulators why their scheme must charge more.
A Treasury spokesperson said any final cap could lie somewhere between the two levels suggested, depending on the evidence received.
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It is important that any cap doesn’t have the effect of levelling charges up”
Association of British Insurers director general
The proposed cap would also only apply to auto-enrolment funds.
Pensions minister Steve Webb told BBC Radio 5 Live Breakfast that today’s move was just the start of a much broader review into pensions charges.
He said: “We do have powers to cap a much wider range of charges. The document today looks at banning something called active member discounts. That means when you leave a firm they jack your charges up – we don’t think this is right so we will probably ban those.”
When asked if charges should be capped lower than 0.75%, the minister said the cap should not be so low that it discouraged providers. He said the cap needed to be “at a level where there’s competition in the market”.
Since last October, workers have been gradually signed up to workplace pensions, such as the government funded National Employment Savings Trust (Nest) scheme, unless they deliberately opt out.
Over the next five years, nine million extra people are expected to join so-called “defined contribution” schemes.
The average charge on a pension set up in 2012 was 0.51%, but the Office of Fair Trading (OFT) estimates that there are more than 186,000 pension pots with £2.65bn worth of assets subject to annual charges of more than 1%.
Older pension schemes, set up more than a decade ago, were found to be charging as much as 2.3% in annual fees.
The government said that someone who saved £100 a month over a 46-year working life could lose almost £170,000 from their pension pot with a 1% charge and more than £230,000 with a 1.5% charge.
And a saver with a 0.75% annual charge on their pension pot could end up £100,000 better off than if they had been charged a rate of 1.5%, it added.
The plans for a cap on fees is outlined in amendments to the government’s pensions bill, which is currently working its way through parliament.
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We also need to see tight regulation so these charges can’t simply be hidden elsewhere”
Which? executive director
The industry has reacted cautiously to plans for a cap, however.
Responding to the launch of the consultation, Otto Thoresen, director general of the Association of British Insurers (ABI), said pension charges were at their “lowest ever average levels”.
The industry was “committed to making pension reform a success”, he said, but warned: “It is important that any cap doesn’t have the effect of levelling charges up.
“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.”
Last month the OFT published a report criticising pension schemes containing £40bn worth of savings that were delivering “poor value for money”, but it stopped short of recommending a fees cap.
It advised the government to make pensions more transparent and easier to compare, and to give greater powers to regulators.
Consumer group Which? said it welcomed the plan for a cap but urged ministers to see if it could be set even lower than 0.75%.
Executive director Richard Lloyd said: “Even a fraction of a per cent can have a significant impact on pension funds, and people need to be confident that their scheme is giving them the best value for money.
“We also need to see tight regulation so these charges can’t simply be hidden elsewhere, and the government should look at what can be done to bring down charges on existing schemes set up before 2001.”
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