Pension scheme charges cap proposed by ministers - The Guardian

A cap of 0.75% is to be imposed on pension scheme charges in a move that will boost retirement funds by hundreds of thousands of pounds, the government will indicate on Wednesday.

In a move that has angered financial advisers, and leapfrogged Labour party proposals, the government will on Thursday launch a consultation paper that proposes a cap of between 0.75% and 1% a year for charges on the £275bn currently sitting in workplace pensions.

Steve Webb, the pensions minister, and Sajid Javid, the Treasury minister, will say they will consult on a suitable figure. But Webb will say: "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 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."

The proposed cap is below the 1% limit proposed by Labour, and goes further than a recent report by the Office of Fair Trading into pension schemes, which stepped back from calling for a one-size-fits-all cap.

But Webb, one of the leading Liberal Democrats in the coalition government, said the OFT report found that parts of the pensions market "were some of the worst they had ever encountered".

He told the House of Commons: "Not enough people are saving for their retirement and therefore every penny they get into their pension has to turn into as much pension as possible. That's why we are going to consult on some pretty tough action on charges. This is a full frontal assault on pension scheme charges."

The OFT report, published last month, warned that up to £40bn of pension savings could already be sitting in schemes that are delivering poor value or are at considerable risk of doing so.

Millions of workers are currently being pushed into workplace pension schemes under the "auto enrolment" programme begun under Labour, which by 2018 will see employees paying in 4% of salary plus 3% from their employer and 1% from the government.

The government has set up a scheme for employers to join called Nest, in which charges are only 0.3% a year, far below the rates typically charged by pension schemes until now.

Webb said that while a 1% charge may sound low, in reality the impact it has on returns is large. In a scenario in which a person paid in £100 a month throughout their working life to a fund with a 1% charge cap, Webb said: "The difference between having no charges and a 1% charge and £100 a month saving is £160,000 coming out of your pension pot."

But the National Association of Pension Funds called the cap a "blunt tool", at a time when competition is already driving charges down below the 0.75% level. The OFT report showed that the average charge on new pension schemes set up in 2012 is 0.51%.

An NAPF spokeswoman said: "Our concern is that a cap would be a blunt tool that would inhibit innovation."

Financial advisers warn that a cap on charges will force pension schemes to switch to indexation – replicating the performance of an index such as the FTSE100 – rather than actively managed stock picking. They also argue that low charges will mean employers will not be able to offer advice or education to workers.

Laith Khalaf of advisers Hargreaves Lansdown said: "At 0.75%, very few schemes will be able to get actively managed portfolios. It's effectively saying that all schemes will have to be indexed. My concern is that you will get an overall levelling down of pension schemes."

Gina Miller of SCM Private, a fund management firm that has campaigned on excessive charges in the investment industry, said Webb was "puffing up his political ego" rather than truly helping consumers. Over the past year, the True and Fair campaign launched by SCM has found that charges can take as much as 40% of a pension pot.

"Webb is starting at the end of the journey, rather than the beginning. The problem in the pensions world is that there is no agreement on what is disclosed in the annual management charge, and no requirement to publish them. The OFT itself has admitted that it's almost impossible to determine what charges are."

She said pension firms typically leave out dealing costs when calculating their charge, which can have a large impact on the outcome of an individual's pension fund.