17th December 2014
People with the smallest pension pots may be hit with the highest charges, with many paying more than 3% per year in management fees, an independent review has found.
A study by the Independent Project Board, found that many savers with less than £10,000 in workplace pension schemes are paying over the odds in fees.
The report focussed on defined contribution schemes, where savers pay in a set amount, but the sum they receive in retirement is not fixed in advance. It also concentrated on “legacy” schemes.
Pensions Minister Steve Webb has threatened to legislate if improvements are not made.
Out of £67.5bn of funds under management , up to £28.5bn could face charges of more than 1% a year. Of these, up to £8bn of funds could face charges of 2%.
Up to £900m of funds being managed could face charges of more than 3% and an estimated 407,000 savers who have joined schemes in the last three years could face charges of more than 1%.
Some savers who leave schemes early could face exit charges of 10%.
The Government has set a cap on workplace pension management fees of 0.75% from next April, but this only applies to the scheme that savers are automatically-enrolled into, and not the whole market.
Huw Evans, director of policy at the ABI, said: “How much people save and for how long can have an important impact on charge levels, and investment performance and quality of scheme governance also matter.
“Providers will welcome the clarity this report provides and will remain absolutely committed to building on the radical changes of the last decade, which have already seen average pension charges fall to their lowest-ever levels for auto-enrolment schemes.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “Long-standing loyal investors shouldn’t be penalised by getting a worse deal than new customers. This audit has revealed that billions of pounds of investors’ life savings are still languishing in poor value products, and worse still, 407,000 have joined poor value schemes in the last three years. This highlights the importance of employers bringing their employee pension arrangements up to date.
“Whilst the audit committee didn’t have the power to force the pension providers to put their house in order, it is clear that if they don’t do it of their own free will today, they may be forced to tomorrow. In the meantime, any investor who thinks they may have pension money in one of these old contracts should look at whether they would benefit from moving it elsewhere. Check first whether you’ll pay a charge to move it.”
Carol Sergeant, chair of the Independent Project Board, said: “The challenge now is for providers and governance bodies to work together under the watchful eyes of the regulators and bring about the necessary changes, so that savers who are not in automatic enrolment schemes can benefit from modern standards and value for money outcomes.”