Pension Charges Cap Only for New Schemes

Department of Work & Pensions will move to cap charges on auto-enrolment pension schemes at 0.75% - despite already having an average charge of 0.5%

Emma Wall 30 October, 2013 | 9:33AM
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Thousands of workers in old-style pension schemes will continue to pay excessive annual costs, as charge caps proposed by the Department of Work & Pensions (DWP) only apply to auto-enrolment schemes. 

Auto-enrolment schemes were introduced since October 2012, and already carry an average charge of just 0.5%. 

In contrast, an Office of Fair Trading investigation last month revealed that schemes launched before 2001 offered the least value for money.

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

While many large auto-enrolment schemes run by insurance companies already comply with the proposed cap, the Government's own default auto-enrolment scheme fails to do so. 

Nest, the default opt-out pension scheme for companies who do not wish to run their own employee retirement savings plan charges 1.8% on contributions and 0.3% in annual management charges. 

This means for every £100 deposited into Nest only £98.20 gets invested. While market returns help this figure to be reduced over the long term to an average of 0.5% a year, for an employee contributing for only a short time this can have a considerable effect on their pension pot.

Laith Khalaf, of Hargreaves Lansdown said that the cap also raised questions about the role of active management in pension schemes.

"Pricing pressure, while positive for the employee, can have a detrimental effect on the investments. Very few schemes will be able to afford to run an actively managed portfolio on 0.75%," he said.

"It may mean that all default schemes simply become a basket of tracker funds."

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Emma Wall  is former Senior International Editor for Morningstar