The government has pledged to tackle high pension charges and create greater transparency in pensions in a bid to help the 11 million people not saving enough for retirement in the UK build up their pension pots.
In response to Ed Miliband’s attack on high pension charges last week, Pensions Minister Steve Webb has said that the coalition will implement some big changes in the world of pensions.
He said: ‘If we are to believe recent stories, sky-high charges are tearing the heart out of people’s pensions. So what is the truth about pension scheme charges?’
Pension charges and auto-enrolment
Webb said that despite huge variation in the cost of pension schemes, in general charges are coming down dramatically. He cited the example of auto-enrolment, due to be rolled out later this year, as an example of these falling charges.
He pointed out that the UK’s biggest employers, who are already preparing for auto-enrolment, have chosen low-cost schemes for their staff. Webb said: ‘Overwhelmingly these are schemes with annual management charges in the region of 0.5% – very low by historic standards.’
The government-created National Employment Savings Trust (Nest) is one of these low-cost schemes, with an annual management cost of around 0.5%. It’s expected that most schemes will cost a similar amount, because the coalition has the power to ban an auto-enrolment scheme if its fees are too high.
Action point: Auto-enrolment and Nest – find out more about auto-enrolment options
Capping pension charges
Although the Government can ban specific schemes it thinks cost too much, capping charges is far less straightforward, says Webb.
He says: ‘There is a risk that the cap becomes the norm and lower charges are levelled upwards’, as well as the problem of deciding exactly which costs are included in the cap.
But that doesn’t mean the Government won’t cap charges where appropriate. The Coalition is looking at capping charges in relation to default pension funds – a default fund is where your money gets invested if you don’t actively decide where to put it.
The Coalition’s action points on pensions
Default funds aren’t the only thing the Government has its eye on. Webb also listed a few other areas it’s looking at:
- Greater transparency in charges
- People being ‘locked in’ to expensive pension schemes with pricey exit penalties
- Leading providers’ back books of pension policies and whether their terms for these existing customers are fair
Webb says that pension providers should consider tackling these problem areas to enhance the ‘battered reputation’ of their industry and offer consumers fairer terms.