Charges on defined contribution pension schemes will be capped at 0.75%, pensions minister Steve Webb announced today as he set out a series of measure that he said would deliver value-for-money to savers and boost transparency.
Pledging an end to 'rip-off pension charges', Webb confirmed that the charge cap would be introduced on the default fund of all qualifying schemes from April 2015. New rules to ban hidden costs were announced.
A Department for Works and Pensions consultation last year explored the possibility of capping charges on auto-enrolment schemes. It was originally proposed that the cap be introduced this April, but following industry objections, the date was pushed back.
Speaking today, Webb said the government was the first to get an 'iron grip' on pension charges. 'We are going to put charges in a vice; and we will tighten the pressure, year-after-year,' he said.
'Over the next ten years, the new charge cap will transfer £200m from the profits of the pensions industry to the pockets of savers. Pension savers have paid too much, for too long. It is time to put the saver first.'
Webb added that people needed to have confidence that they were putting money into good pension schemes where their money would be looked after.
'The measures we are announcing today will make sure that we are seen as world leaders in transparency and value for money,' he said.
According to DWP figures, an individual earning £20,000 would save around £35,000 over their lifetime if they saved in a scheme with a 0.75% charge compared to a 1% charge.
For schemes with combination charge structures, the government has also set out equivalent caps.
The DWP has grouped together three categories of pension charges. These are: payments for sales commissions; charge hikes when people are no longer employed but leave money in the company's pension schemes; and 'consultancy charges' where members have to pay for advice given to their employer.
Responding to the announcement, Nick Salter, president-elect of the Institute and Faculty of Actuaries said low and capped charges do not guarantee good pension outcomes.
He said: 'In this respect contributions and investment returns will continue to have a very significant impact and the further proposals to establish Independent Governance Committees, to ensure that scheme members' interests are properly considered, may in time be viewed as an even more important reform.'
Looking ahead, he said: 'Defining what is incorporated within charges, and the charges that must be displayed by pension providers, will make comparisons of pensions much simpler and that will help employers as well as individuals looking to identify the right scheme for them.'
The Association of British Insurers said it remained opposed to a cap, noting that average charges were at their lowest ever levels.
But director general Otto Thoresen added: 'Despite this, the government think a charge cap is necessary, and in this context the decision to phase in the implementation of these changes is helpful, as is the intention to review the best way to improve transparency on transaction costs before decisions are made in 2017.
'The implementation of auto-enrolment, combined with the radical reforms in last week's Budget, have created a challenging environment for employers and pension providers.'
At Hargreaves Lansdown, head of pensions research Tom McPhail agreed that the decision to phase in the cap was a sensible one as it gave the industry reasonable time to accommodate the changes.
'The charge cap will only apply to default funds at the outset. This is a sensible decision as it would be wrong to prevent investors from benefitting from specialist active management if they wish to do so.'
Lee Hollingworth, head of DC at actuaries Hymans Robertson, welcomed the 0.75% cap, noting that every 1% increase in annual management charges wipes out 20% of a pension pot.
'A flexible low cost pension savings market has to be the right objective in order to encourage people to save more,' he said.
'Questions do remain to be answered, not least information on transaction costs. Transparency on these fees will present significant hurdles for the industry. It's going to be hard for fund managers to give an accurate figure in advance for transaction costs for example.'
But, Jonathan Lipkin director of public policy at the Investment Management Association, said a cap was not the best way forward and the main focus should be on improving governance.