‘Guilty secrets’ are revealed in independent pension fees report

As much as £25.8bn of pension savers’ money is at risk of being exposed to high charges, according to a report by the Independent Project Board (IPB), which has examined £67.5bn of savers’ assets in the course of its work overseeing an inquiry into charges and benefits in legacy defined-contribution workplace pension schemes.

The IPB found that between £23.2bn and £25.8bn of assets are potentially exposed to fees which equate to an annual management charge of above 1 per cent.

Between £5.6bn and £8bn of assets are potentially exposed to charges above 2 per cent, and around £900m to charges above 3 per cent.

Pensions Minister Steve Webb said it was “shocking” that people with smaller pension pots seemed to be at risk of the highest charges and said he would be asking pension providers to take decisive action in response to the findings.

“I think this report shows what I’d call the guilty secrets of the pensions industry writ large and the onus is now on the industry to put its house in order,” he said.

Small differences in charges can have a major impact on a pension pot by the time someone retires. For example, the average earner building savings of £30,000 would be £1,600 better off in a scheme levying 0.75 per cent compared with one charging 1.5 per cent.

Schemes where savers are potentially exposed to the very highest charges are more likely to have complex fee structures; Mr Webb noted that the report had found 38 different types of charges and 291 different combinations of charges.

Nearly all assets which are potentially exposed to charges of more than 3 per cent are in schemes with monthly fees or deductions from contributions.

Of the £900m of assets exposed to charges over 3 per cent, most is held by savers with pension pots of less than £10,000. The report said that for such savers, the impact of monthly deductions can be “very high”.

The IPB also found that thousands of savers in schemes with the potential for high charges had only joined them relatively recently.

It estimates that 407,000 savers who have joined schemes in the last three years could be exposed to a charge of more than 1 per cent in the future. Of these, 178,000 could be exposed to charges over 2 per cent and 22,000 are at risk of charges of over 3 per cent.

Around £3.4bn worth of pension assets have potential exit charges of 10 per cent if savers left their scheme now, the report found. Of this, around £800m is held by savers aged over 55, who will be eligible to take advantage of new freedoms from April 2015, when retirees will be able to access their full pension pot, without having to buy an annuity.

Mr Webb said that although the Government is set to introduce a 0.75 per cent charge cap in April, it needed to do more for those already in high-cost pensions.

He said: “I’m going to be contacting all the big providers, getting them in, asking them for big, bold responses to this report. We can’t spend two years sorting this out and I think the onus is now on the industry to get its act together.”

Meanwhile, the IPB is writing to the provider of each potentially high-charging scheme to recommend they identify actions that can be taken to improve outcomes for savers and to stop new savers joining poor value schemes, providing answers to the relevant governance body by the end of June 2015 at the latest.

Carol Sergeant, chairman of the IPB, said the audit had shown that there was no “one size fits all” charge structure that would ensure all savers got value for money all of the time.

“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,” she said.