Charges set to climb: the 'illogical' pensions reform

The annual cost of personal pensions looks set to rise.

RU64 - a regulation that obliges financial advisers to tell customers about cheap stakeholder pensions when discussing long-term savings - has long put pressure on providers to keep average charges on all personal pensions to between 1 and 2 per cent.

But RU64 is now set to be axed after a review by the City regulator, the Financial Services Authority (FSA).

Aghast at the proposed abolition - likely to be announced in March - the consumer watchdog Which? has condemned as "illogical" a decision that will encourage companies to raise annual management charges at a time when people aren't putting enough by for their retirement. "It makes no sense to allow the fees to rise [so eating into savers' returns] when affordability is an issue," says Mick McAteer at Which?.

MPs are aware of the dangers too: last week's Treasury Select Committee hearing into financial inclusion made mention of the importance of RU64 in keeping fees down - particularly for those on low incomes.

Over the next few weeks, Which? plans to meet with FSA and Treasury officials to try to change the regulator's mind.

Why does RU64 exist?

The Government launched its cheap stakeholder pensions in 2001. These new plans capped commission at 1 per cent - later 1.5 per cent - and let savers transfer pension pots between different employers without a hefty financial penalty.

Crucially, RU64 forced all advisers to take this initiative into account when recommending any private pension. Not surprisingly, that made it hard to convince customers that it was in their interest, instead, to choose a pension with fees as high as 6 per cent. As a result, providers lowered charges across the market.

So why try to remove it?

The pensions industry has successfully argued that, since RU64's introduction, sales of personal pensions with advice have fallen.

The 1.5 per cent annual charge, it says, doesn't generate enough commission to allow providers to offer advice. As a result, RU64 has led to a "reduction in the sales effort" by companies, resulting in fewer sales.

This point was accepted last year by the FSA, which went on to accept that it should shoulder the blame because it imposed RU64 in the first place. So now it backs scrapping it.

Is now the right time to do it?

RU64 was, the pensions industry stresses, a child of its time, assisting in the launch of stakeholders. Now these funds have been established, it's time to get rid of the rule. "[RU64] did have a point but that point has gone and become anachronistic to competition and choice," says a spokesman for the Association of British Insurers (ABI).

Higher charges will see more money spent on developing better pension funds, marketing and distribution for savers of all income levels, the ABI adds.

And the FSA agrees?

Yes. The regulator worries that if charges are kept low, "firms may yet have insufficient incentives to devote more resources to developing and distributing pensions to a wider range of consumers.

"Removing the rule might help to allow the market to meet that demand."

But Which? disagrees, arguing that providers will now have less incentive to bother with lower-income savers; if they couldn't sell stakeholders to low earners with RU64, they won't do so without it.

What about the risks to consumers?

The FSA says it's alert to these. Removing RU64 could "encourage a move towards more complicated charges and less transparency in general", it concedes, and the winners will be providers and advisers.

But, the FSA adds, higher charges could in effect be offset by greater take-up of pensions as it becomes easier for the industry to sell across the board with advice.

And, as a safeguard of sorts, companies and advisers will still have to make mention of stakeholder schemes - and their potential suitability - in the "key features document", which explains product details to consumers.

Will the FSA monitor things?

"Very carefully", it says. It will act if there is "significant consumer detriment" and promises to monitor the impact of fees on costs; how charges apply; and the number of products with lock-ins and penalties.

Should we worry?

Financial advisers of all hues - whether tied to one firm or independent - say no. The more competitive market that has come with stakeholders and self-invested personal pensions - along with the advent of "A-Day", 6 April, when rule changes will make it easier to invest in a pension fund - will keep charges reasonable, they argue.

Of course, many would say advisers can look forward to more commission.

But as long as stakeholder schemes exist, there should be some downward pressure on costs. The question is, for how long will they exist? Which? believes the end of RU64 "will kill off" stakeholders. That providers will still have to refer to them is a world away from stressing that they're cheaper.