The government has moved to ban consultancy charges in auto-enrolment pension schemes. Earlier this year, Which? research established the high charges proposed by consultants could pose a threat to many employees’ pension savings.
Pensions Minister, Steve Webb, today confirmed that the government will outlaw consultancy charging for auto-enrolment schemes.
Consultancy charges banned
Announcing the ban, the Pensions Minster said: ‘It is vital that the pension savings of individuals who are automatically enrolled are protected. Following a thorough review, I have concluded that the consultancy charging mechanism is not appropriate in schemes used to comply with the employer duties under the Pensions Act 2008’.
Welcoming the Minister’s initiative, Which? executive Richard Lloyd said: ‘This is a big win for millions of consumers with auto-enrolment pension schemes. It is absolutely right to ban these unnecessary and unfair charges that meant people’s retirement savings were going straight into consultants’ pockets rather than pension pots.’
Charges threat to employees’ pensions
Which? exposed the high charges proposed by consultants earlier this year. A ‘mystery shopping’ exercise revealed how much insurance companies were prepared to let consultant charge- and the risk high charges posed to millions of people who will join a pension scheme under auto-enrolment over the next few years. We highlighted the problem to the Work and Pensions Select Committee in January, presented our research to the DWP in February, and in April wrote to the Minister, urging a ban.
Consultancy charges are levied on the savings of pension scheme members by consultants who advise their employer on the choice of provider. These can be disproportionately high in the early years. In some cases they could reduce your first year’s saving by 50%.
The impact of charges is particularly damaging for low earners and those who change jobs frequently. Front-loaded charges of the type applied by consultants can seriously hinder their efforts to build up adequate pension savings. Our research revealed the risk of high levels of consultancy charging could mean low to middle income earners have to contribute four, five or even six years before seeing any return.
Scheme charges cap considered
The government has also announced that it will be consulting on a cap on pension scheme charges later this year. Mr Webb confirmed this in his statement and referred to a forthcoming OFT report on the workplace pensions market. Which? will continue to campaign for quality standards to be set for workplace schemes to protect consumers from excessive charges.