The insurance industry could face a £1bn hit from the governments pension fee cap when it comes into effect next year, the chief executive of the mutual Royal London has warned.
The Department for Work and Pensions is planning to introduce a charging cap on defined contribution pension schemes, to be set at 0.75% of managed assets, from April 2015.
But Phil Loney, Royal London's chief executive, highlighted that the sector was already starting to see the adverse impact of the fee cap.
'With the charge-capping and other reforms introduced by the government to the group pensions market, we are beginning to see the first signs that this headline-grabbing policy will have precisely the opposite consequence to that which is intended,' he said.
Issuing its latest financial results yesterday, the mutually-owned insurance group said profits were 45% down on last year at £139m. The fee cap was cited as the main reason for the decline.
Loney claimed that pensions minister Steve Webb had 'grossly underestimated' the financial impact of the cap on the industry.
'Webb told Parliament that pensions companies' total revenue would be reduced by £200m over a 10-year period,' he said.
'The provisions for the pension charge cap that we have seen from providers during this reporting period suggest that this is a gross underestimate. We estimate that the total reduction in long term insurer income may well reach £1bn.
'This seems to me to be unacceptable margin for error in the government's understanding of the impact of its actions and the size of the impact is driving many insurers to introduce employer fee arrangements to mitigate against the impact of further reductions in the price cap.'
Tom McPhail, head of pensions research at Hargreaves Lansdown, agreed with Loney and said: 'Now the insurance industry, [including] Royal London, Standard Life and Scottish Widows is making substantial provisions to cover the loss of income from the introduction of the charge cap.'
He noted that pension schemes could be forced to find efficiencies and to deliver better value for money, although the evidence so far suggests otherwise. A more likely outcome was employers paying larger fees to help cover the cost of running the schemes.
'It is a great shame that the DWP lacks the necessary evidence to prove that its decision in this matter was well founded,' he said.
A Department for Work & Pensions spokeswoman said: 'According to the government's green-rated Impact Assessment, the default fund charge cap will transfer around £200m from the pensions industry to savers over the next 10 years.
'Of course, the impact on individual providers will vary, depending on their own current charge levels.'