Pension Charges to be Capped at 0.75%

Pensions minister Steve Webb is expected to announce a plan to cap the cost of workplace pension schemes at 0.75%

Emma Wall 29 October, 2013 | 4:49PM
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Workplace pension charges should be capped at 0.75% a year, in line with the cost structure of auto-enrolment schemes, pensions minister Steve Webb has said.

The politician has confirmed he is backing a paper due to published by Department for Work and Pensions tomorrow, proposing as much.

Auto-enrolment was launched in October 2012 starting with the country's largest companies and around 10 million people will eventually be enrolled into schemes over the next couple of years. 

The opt-out pension scheme carried a price cap of 0.75% as dictated by the pensions minister. But existing workplace pension schemes can carry high charges, much to the chagrin of retirement savers. 

Peter McDonald, pensions partner at PwC, commented: "Introducing a cap on pension charges is a step forward but it is vital that 0.75% is used as the maximum amount that can be charged, rather than the default option. Many schemes, particularly master trusts and those for larger employers, should be able to charge less due to economies of scale. Competition should also help drive down charges."

The announcement follows campaigning from industry bodies and consumer groups to cut the cost of workplace pensions. 

Which? executive director Richard Lloyd last month called for the Government to set high-quality minimum standards for all workplace pensions as soon as possible, including a cap on all charges. 

His comments followed an Office of Fair Trading paper which concluded workplace pension schemes are too complex and employers must be better informed. 

Tom McPhail, head of pensions research at Hargreaves Lansdown, lambasted the insurance companies and the Association of British Insurers (ABI).

"Its members have agreed to an immediate audit of these DC schemes and whether members are getting value for money," he said. "At the same time they should look at some of the older personal pensions and with profits pensions where routinely policyholders feel trapped by exit charges yet are stuck in old, high cost, underperforming plans."

Around £30 billion of current pension savers’ money is in old style and high charging pension schemes. The OFT also recommended that the Department of Work & Pensions launch a consultation into transparency and charges - which often confuse scheme members - to help reduce the complexity of these schemes.

Gina Miller, founder of the True and Fair Campaign welcomed the move from the DWP, but said that restoring confidence in the pensions and investment system required total transparency on all fees and charges; not a cap on just one element of costs.

"Politicians have a vital chance to improve and simplify the pensions system and any action to reduce the cost of pension funds has to cover all fees and charges, not just the headline Annual Management Charge. Many of the costs that pension savers face are ‘hidden’ and that is where action is most urgently needed. Politicians need to stop tinkering and bring in fundamental change," she said.

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Emma Wall  is former Senior International Editor for Morningstar