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Plan to ban 'rip off' pension fees
Plans to put an end to "rip off" pension charges which can wipe tens of thousands of pounds off someone's retirement savings pot are to be set out by the Government.
A ban on all charges above 0.75% a year is among the options for a crackdown in a consultation being launched, to help give savers confidence that they are getting good value for money as the Government rolls out its landmark reforms to automatically place people into workplace pensions.
While the industry has been working to improve transparency and the average charge on new pension schemes set up in 2012 is around 0.51%, the Office of Fair Trading (OFT) estimates that there are more than 186,000 pension pots with £2.65 billion worth of assets which are subject to an annual charge of above 1%.
Small variations in charges can make huge differences over time to the eventual size of the pension pot that someone ends up with. The Government said that someone who saves £100 a month over a typical working lifetime of 46 years could lose almost £170,000 from their pension pot with a 1% charge and over £230,000 with a 1.5% charge.
A pension saver with a 0.75% annual charge on their pension pot could eventually end up £100,000 better off than if they had been charged a rate of 1.5%, the Government said.
Other options for caps being considered by the Government include a higher charge cap of 1% and a "two-tier" cap. The two-tier cap would involve a standard cap of 0.75% and as well as a higher cap of 1% if employers explain to the Pensions Regulator why their scheme charges more than 0.75%.
Any final cap could lie somewhere between the two levels suggested, depending on the evidence received.
The OFT called for a tougher clampdown on charges in a report last month, which warned that "most employees do not engage with, or understand their pensions", but it stopped short of recommending a cap on charges, raising concerns about how costs would be defined and also that providers may see a cap as a target.
Up to nine million people will eventually be newly saving into a pension or saving more under automatic enrolment, which will increase the amount being saved in to workplace pensions by around £11 billion per year.
More than 1.7 million people have been placed into pension schemes so far under the reforms, which started last year with bigger firms and a higher-than-expected nine out of 10 people so far are staying in their pension rather than opting out.
Bigger firms tend to have more experience of pension schemes and promoting their benefits to their employees and concerns have been raised about making sure that smaller firms also choose good quality pension schemes for their workers as auto enrolment rolls out over the next five years.
Confidence among consumers that they are going to get good returns on their cash is seen as vital for ensuring auto-enrolment continues to build on its early success.
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."
Mr Webb told the Work and Pensions Committee last week that there is a "strong case" for imposing a cap on pension charges and said there has clearly been some "unacceptable practice" in the past.
Speaking yesterday, Mr Webb said the Government is planning "a full frontal assault on pension scheme charges".
The Government wants to hear from the industry and the public on how it can best design a charging cap that can protect people's savings before putting its plans in place next year.
It also wants to make it easier for employers to compare pension schemes to help work out the best deal for savers and the consultation will help the Government decide what else can be done to improve transparency.
Financial Secretary to the Treasury, Sajid Javid, said: "The Government is determined to help hard working families and that includes making sure someone's saving will deliver the biggest possible returns and not be eaten away at by a variety of charges and fees.
"As part of this plan, we will bring forward significant change to the pensions sector including a cap on certain charges, which should save many individuals tens of thousands of pounds."
Otto Thoresen, director general of the Association of British Insurers (ABI), said the industry recognises concerns over pension charges, which are at their lowest ever average levels.
He said: "It is important that any cap doesn't have the effect of levelling charges up. The Office of Fair Trading raised a number of concerns about this when deciding not to recommend a cap in its recent study of workplace pensions.
"The detail around what is included in the charge definition will be crucial, as is the need to recognise that other factors contribute to customers receiving value for money.
"The industry is committed to making pension reform a success and of course will engage fully with this consultation."
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."
Mr Webb said the National Employment Savings Trust (Nest), set up as a not-for-profit option for firms to use as part of the Government's automatic enrolment reforms, would act as a benchmark to prevent pension firms raising their charges to the maximum permitted.
He told BBC Radio 4's Today programme: "Nest was set up by the Government to be a low-cost, not-for-profit scheme and in a sense that provides a benchmark. That's one of the reasons why the rest of the industry can't just jack up its fees up to a price cap because Nest is there holding a benchmark.
"Most firms could deliver at the sort of costs we are talking about but because there's very little competitive pressure in the market, they don't do so."
The Government was also looking at banning "active member discounts" which result in pension charges going up if you leave a company.
"Of course, you don't notice it because you don't work for the firm any more," he said. "We are looking at banning that altogether."