Consultancy charges on pension schemes being used for auto-enrolment will be banned under plans set out by pensions minister Steve Webb today.
Regulations will be laid 'as soon as possible' to outlaw the charges as part of a 'two-pronged' approach to address 'high and inappropriate' charges, he revealed.
The other aspect of the plan will involve a consultation being held this autumn to cap the charges levied on all defined contribution default funds - the investment option used by most pension savers. This move comes in response to the Office of Fair Trading inquiry into competition in the DC market which was launched in January and is expected to report shortly.
Webb noted that the government's own review of consultancy charges had found that existing measures to prevent advisers deducting high charges from members' pension pots were inadequate. Consultancy charges can have a disproportionately high impact on people who move jobs regularly, he added.
'With millions of people taking up pension saving for the first time under automatic enrolment, we have to give people confidence that they will get good value for money,' Webb explained.
'That is why we are banning consultancy charges, where scheme members end up paying for advice given to their employer. In addition, the OFT is investigating the whole workplace pensions market and we will act promptly and vigorously later this year in the light of their findings.'
The announcement came as the Department for Work and Pensions also published its Pensions Bill, as promised in this week’s Queen’s Speech. The bill, which was presented to Parliament yesterday, includes the introduction of a new single-tier state pension, to be implemented in April 2016.
It includes plans to bring forward the increase in the state pension age to 67 and to automatically link increases in the future state pension age to rises in longevity.
The bill will also legislate for the new ‘pot follows member’ system which aims to make it easier for people to keep track of their pension pots as they move from job to job.
And it will introduce a new statutory objective for The Pensions Regulator to take into account employer growth in all its regulatory activities.
The plan to take action on consultancy charges was welcomed by Morten Nilsson, the chief executive of pensions provider NOW: Pensions. 'Building consumer confidence in auto-enrolment is essential to its long-term success. Over time, consultancy charges can significantly reduce the value of members' pension pots and these opaque charging structures help to stoke the fires of mistrust.
'The most important outcome of auto-enrolment is that members receive value for money to ensure they are in the best possible position to build up a substantial pot of money to live off comfortably in retirement. Today's announcement will go some way to helping them achieve this goal.'
His sentiments were echoed by Tim Jones, chief executive of the pension scheme set up by the government specifically to meet the need of employers affected by auto-enrolment, the National Employment Savings Trust.
'We were concerned that consultancy charging could have been detrimental to specific groups of customers and, more generally, damage the reputation of automatic enrolment. We welcome that potential being removed,' he said.
However, Neil Carberry, director for employment and skills at the CBI said the business group was 'surprised' the government had decided to take action on charges given they were at their 'lowest-ever' level.
The CBI also remains 'unconvinced' about the benefits of the pot-follows-member approach for transfers of small pension pots, he added.