6th November 2013
Consumer group Which? has launched a campaign to cap all workplace pension charges at a 0.5% annual management charge.
It has also organised a petition to gather signatures from the public to send to the Government consultation on charges with responses due by November 28.
Currently the government is consulting on a charge cap ranging from 0.75 to 1% applying to all auto-enrolment pension schemes but not necessarily to other pension schemes.
The issue of charges has become increasingly heated at least partly because the auto-enrolment pension reforms rely on inertia in that employees have to actively opt out of contributing or they are enrolled into a pension scheme.
The choice of scheme also depends on the employer not the employee in terms of provider chosen, though it is also clear that many employers will opt for the state backed scheme known as the National Employment Savings Trust. Nest’s charges are below those demanded by Which? at 0.3% but it also levies an initial contribution charge of 1.8% – which it says is a temporary measure though it won’t say how long it may last for.
Over the life of a plan, this means charges are relatively low, but it can have a bigger impact on older pension investors. Some pension experts say that Which? is effectively criticising Nest along with all the private sector alternatives.
Which? says it is not aiming its criticisms at Nest which it says provides reasonable value and that charges should come in at under the suggested 0.5% cap.
Here is a list of the demands made and the supporting view of Which’s executive director Richard Lloyd.
1. Set the charge cap at 0.5% rather than 0.75%.
2. Roll out the cap to cover all new and existing workplace pensions, rather than just new auto enrolment schemes.
3. Stop charges from being increased when people switch jobs.
4. Ban commission payments for auto enrolment schemes, as well as consultancy charges for all pension schemes.
5. Make sure clear, consistent and regular information is provided to consumers about their pension charges.
6. Set up independent boards to oversee pension schemes with clear legal duties to get the best deal for scheme members.
Richard Lloyd, says:“Millions of people are currently paying in to rip off pensions, but many might not realise so much of their money is being taken in fees until it’s too late.
“While we strongly support the direction of the Government’s plans there is an urgent need for better minimum standards for all workplace pensions so people can be confident that they are being enrolled into high quality, good value schemes.
“With consumers being squeezed by the rising cost of living, there is no room for rip-off pension schemes in the workplace.
“In a separate Which? investigation we found a third (35%) of people who have opted out of auto-enrolment, or say they will opt out, do so because they do not trust the pension industry to look after their money, and one in five (22%) because they are concerned about the quality of the scheme.”
Not everyone agrees that this is the right medicine.
Hargreaves Lansdown’s pension expert Tom McPhail says the focus should be older legacy schemes rather than new schemes which he believes are providing value for money.
He also says that on Which?’s criteria, the government backed scheme also falls into the rip-off category, though as we noted earily Which? does not agree.
Mr McPhail says: “Which? is right to highlight the importance of low charges as every pound saved means a pound more for your retirement. The recent OFT report has identified that some legacy schemes have charges in excess of 1%. For employees auto-enrolled into such schemes it is important to bring charges down. New schemes being set up today already have charges of less than 1% and in the main are already delivering good value for money (typically they are between 0.5% and 0.8%).
“However a simple charge cap of 0.5% across the board would make NEST a Rip Off pension, as anyone joining NEST for less than 16 years will end up paying more than 0.5% in total charges. This is obviously a ridiculous accusation, NEST is a very good pension scheme set up on competitive terms. Hargreaves Lansdown believes the focus should be on legacy schemes as market forces are already successfully at work on new schemes.
“30,000 employers have to go through their auto-enrolment staging between now and next summer. It is absolutely vital that this is a success. So far auto-enrolment has been working very well, with competitive charges and low opt-out rates. This success has been built on good communication in the workplace and the support of employers. The government’s priority should be to build on this success. In the meantime, there is an on-going role for Trustees and scheme brokers to play in continuing to drive charges down further.”