Pensions Minister Steve Webb has launched a consultation on capping pension scheme charges for employees signed up under auto-enrolment. He is considering an outright ban on all charges above 0.75%.
Pension fees cap for auto-enrolment schemes
Proposals to cap pension scheme charges could impact 6-9 million employees signed up in the on-going pensions auto-enrolment scheme, which began in 2012 and continues through to 2017.
Although some pension scheme charges are already as low as 0.5%, the OFT estimates that 186,000 pension pots, with assets of £2.65 billion, have charges above 1.0%.
The government’s proposal will consider three options:
- A cap of 1.0%
- A cap of 0.75%
- A two-tier, ‘comply or explain’ cap, with 0.75% as standard and 1.0% a higher option for employers who can justify this to the Pensions Regulator.
The impact of pension charges
The impact of pension scheme charges has long been a concern. A small reduction can make a big difference, as Government figures show.
If you pay in £100 a month over a career of 46 years, your pension pot would be cut by £170,000 with a 1.0% annual charge and by £230,000 with a 1.5% charge.
If the charge was 0.75%, rather than 1.5%, you would be £100,000 better off when you came to retire. Charges encompass administration fees, contribution fees and investment fees, such as transaction costs.
Which? responds to the proposed changes
Responding to the proposed charges cap, Which? executive director Richard Lloyd said: ‘We welcome plans to cap charges on workplace pensions, but the Government must take this opportunity to really scrutinise the market to see if the proposed cap could be set any lower. Even a fraction of a per cent can have a significant impact on pension funds, and people need to be confident that their scheme is giving them the best value for money.
‘We also need to see tight regulation so these charges can’t simply be hidden elsewhere, and the Government should look at what can be done to bring down charges on existing schemes set up before 2001.’
Launching the consultation, The Pensions Minister, Steve Webb, said: ‘The Government believes that enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges. We are consulting on a cap on pension charges. A range of options will be on the table including an outright ban on all charges above 0.75% per year.
‘I’m confident that we will make the system fairer for anyone being automatically enrolled into a workplace pension and will finally address the issue of charges which has been neglected for far too long.’