A ban on all charges above 0.75 per cent a year is among the options for a crackdown in a consultation being launched, to help give savers confidence that they are getting good value for money as the Government rolls out its landmark reforms to automatically place people into workplace pensions.
While the industry has been working to improve transparency and the average charge on new pension schemes set up in 2012 is around 0.51 per cent, the Office of Fair Trading (OFT) estimates that there are more than 186,000 pension pots with £2.65bn worth of assets which are subject to an annual charge of above 1 per cent.
Small variations in charges can make huge differences over time to the eventual size of the pension pot that someone ends up with. The Government said that someone who saves £100 a month over a typical working lifetime of 46 years could lose almost £170,000 from their pension pot with a 1 per cent charge and over £230,000 with a 1.5 per cent charge.
A pension saver with a 0.75 per cent annual charge on their pension pot could eventually end up £100,000 better off than if they had been charged a rate of 1.5 per cent, the Government said.
Other options for caps being considered by the Government include a higher charge cap of 1 per cent and a “two-tier” cap.
The two-tier cap would involve a standard cap of 0.75 per cent and as well as a higher cap of 1 per cent if employers explain to the Pensions Regulator why their scheme charges more than 0.75 per cent.
Any final cap could lie somewhere between the two levels suggested, depending on the evidence received.
The OFT called for a tougher clampdown on charges in a report last month, which warned that “most employees do not engage with, or understand their pensions”, but it stopped short of recommending a cap on charges, raising concerns about how costs would be defined and also that providers may see a cap as a target.
As many as 9m million people will eventually be saving into pensions or saving more under automatic enrolment, which will increase the amount being saved in to workplace pensions by about £11bn per year.
More than 1.7m people have been placed into pension schemes so far under the reforms, which started last year with bigger firms and a higher-than-expected nine out of 10 people so far are staying in their pension rather than opting out.
Concerns have been raised about making sure that smaller firms choose good schemes as auto enrolment continues over the next five years.