Industry warning over cap on workplace pension fees

Up to nine million Britons are being auto-enrolled into a workplace pension scheme between now and 2018 and there had been growing fears that they could see much of their retirement savings swallowed up by punitive charges levied by pensions companies.

In response, the Coalition Government, whose Pensions Minister is Steve Webb, has said that it would like to impose a cap on these workplace pension charges of between 0.75 per cent and 1 per cent a year. This is much lower than the fees paid by members of some older workplace schemes which can be as high as 2.3 per cent, swallowing up much of the hoped-for investment growth.

Morten Milson, the chief executive officer of NOW pensions, which manages hundreds of workplace pension schemes, said it was about time action was taken over charges because: "High charges eat away at pension pots, foster mistrust in the industry and act as a disincentive to savers." He added that over 30 years of saving having a pension scheme with a 0.3 per cent annual charge, comfortably within the cap, rather than a 1.5 per cent fee, which would be banned but is typical of older plans, could increase the total return by a whopping 26 per cent.

Chris Noon, partner at pensions consultancy Hyman Robertson, says a cap is on the surface "great news for consumers" as the 0.75 per cent level is "much lower than many were expecting".

However, the pensions industry has been here before. A decade ago a 0.5 per cent cap was placed on stakeholder pensions and they bombed as pensions companies saw little point in marketing them. Mr Milson, for instance, is worried that with a cap at 0.75 per cent: "it's almost inevitable that many providers will be tempted to push members into cheap, passively managed funds which won't necessarily deliver the risk-managed returns savers deserve."

In other words, although fees will be lower, overall investment performance may suffer. What's more, the government's decision to move to a pensions cap – particularly such a low one – has raised eyebrows because it flies in the face of an Office of Fair Trading's recommendation: "The OFT was worried it might lead to all providers increasing their fees to whichever level was set. We can't see this scenario playing out given the competitiveness of the market though."

However, more evidence is emerging every day of the poor state of Britons' pensions saving. More than 12 million Britons are saving nothing and two thirds of people aged 35-44 recognise that they are not putting away enough to ensure a comfortable retirement, according to financial advice firm True Potential. Against such a backdrop and with many experts critical over the level of pensions saving envisaged by auto enrolment it is no surprise the government has decided to get tough on charges.