The Department for Work and Pensions is considering capping the annual charges imposed on members of workplace defined contribution schemes at 0.75%.
30 OCTOBER 2013 | BY JUDITH UGWUMADU
Pensions minister Steve Webb today issued a consultation on capping default fund charges and a ban on active member discounts, which hike up charges for people who have left a particular scheme.
The government is considering three options for capping: a charge cap of 1% of funds under management; a lower charge cap of 0.75% of funds under management; and a two-tier 'comply or explain' cap, which would allow some employers to increase the cap to 1% if they provide The Pensions Regulator with their reasons for doing so.
The cap would first be imposed on employers staging from April 2014 and be extended to cover all schemes by April 2015.
Writing in the foreword to the consultation, Webb said that, after the first year of auto-enrolment, 1.7 million people were now paying into a workplace scheme.
But he said that more work needed to be done to ensure that the schemes used for automatic enrolment were of good quality, well governed, well administered and with clear charges for members.
'While I am pleased that some large employers setting up schemes for automatic enrolment are getting good deals for their employees, there is a real risk that [small and medium-sized enterprises] will struggle to negotiate the same low charges or will use high-charging legacy schemes,' he said. 'When small differences in charges can make a significant difference to final retirement incomes this is an area where we cannot afford to be complacent.'
'Therefore, through this consultation, we want to assess what can be done to improve transparency in pension scheme charges and to look at whether there is a role for the government in improving disclosure.'
'We also want to test the case for capping default fund charges and have offered a range of structures to help tease out some of the various issues.'
An illustration included in the consultation document showed that charges of 1% could cost someone who has saved throughout their working life £170,000 from their pension pot. A 1.5% charge would cost more than £230,000.
But the National Association of Pension Funds pointed out that charges have decreased over the past few years with average charges now standing at 0.51%. Some charges are more than 0.75% because the services and support on offer result in a higher return on investment, the association said.
Helen Forrest, the NAPF's head of policy and advocacy, said: 'Charges should be seen as part of a bigger picture that includes quality of services provided to savers through their working life and a robust investment strategy that generates good returns.'
Laith Khalaf, head of corporate research at Hargreaves Lansdown, said lower charges were good for pension savers and should encourage people to put more aside for their retirement.
'The government needs to ensure, however, that it does not prompt a wholesale decline in the quality of pension schemes, just as millions of people are due to be automatically enrolled into them,' he warned.
'Competition on charges in workplace pensions is fierce and schemes set up today already offer members very good value. The main problem in the market, as identified by the Office for Fair Trading, is older schemes, in particular those set up prior to 2001.'
The consultation closes on November 28 2014.