Penalising non-active members of pension schemes by using a two-tier charging system to benefit active scheme members could endanger the success of auto-enrolment, Legal & General said yesterday.
The firm's pensions strategy director Adrian Boulding called for an end to the practice of Active Member Discounts, under which administrative charges for active members of a scheme are artificially reduced at the expense of members who have stopped contributing.
Traditionally, these charges have been applied by schemes to members who have deferred their benefits - often because they have left the company involved.
However, according to Legal & General, these charges could also apply to workers being auto-enrolled into a pension scheme who find themselves involuntarily 'locked in' to a pension scheme. This could happen if they fail to opt out of the scheme within the one month time period permitted under the new system.
Boulding said: 'It seems unfair to us that these members will face an immediate hike in charges under those schemes that operate an AMD charging structure.
'We need to see restrictions put in place to prevent pension providers and employers applying a two tier charging structure to new auto enrolled members that could penalise employees just because they have opted out of their pension scheme too late to qualify for a refund of their first contribution.'
Restrictions on a two-tier charging structure should also apply to members who have left service, Legal & General added.
Boulding said the issue showed the importance of introducing a system so that pension pots are automatically aggregated when people move employers. The 'pot follows member' approach proposed by the government will help solve the problem, he said, 'but we need to ensure that these new generations of savers are not blighted by inappropriate charging structures.
'There is a real danger that the practice could endanger the whole auto enrolment programme if AMDs are allowed to continue unchecked,' he added.