The Department for Work and Pensions (DWP) has announced that it will introduce a 0.75% cap on charges for default funds of all qualifying pension schemes.
The cap, which aims to end "rip-off" charges and ban hidden costs, will be implemented from April 2015.
DWP said that over the next 10 years, the Government estimates that an extra £195m of pension contributions will turn into pension savings rather than being "swallowed up" by unnecessary costs and charges.
The Government said that it has also set out equivalent caps for schemes with combination charge structures.
Pensions minister Steve Webb said: "Through the new measures, this Government will be the first to get an iron grip on pension charges. We are going to put charges in a vice; and we will tighten the pressure, year-after-year."
Three different categories of pension chare will be banned altogether: payments for sales commission which are deducted from members' pensions; charge hikes when people are no longer employed by a company but leave money in the company's pension scheme; and 'consultancy' charges where members have to pay for advice given to their employer.
New rules will also make sure that all of the hidden 'transaction' costs in pension schemes are published, and the Government will then consider whether these should also be included in the new charge cap.
An independent audit of pre-2001 and high-charging pension schemes is due to complete by the end of the year and the Government will consider whether further action to protect scheme members is necessary following the review.
The Government said that 10m workers will have been auto-enrolled into pension schemes by 2018 and this will help to build a stronger economy.
Webb said: "The pensions revolution does not stop at auto-enrolment. People need to have confidence that putting money into good pension schemes where their money will be looked after.
"The measures we are announcing today will make sure that we are seen as world leaders in transparency and value for money."
The industry's reaction to the announcement was mixed.
National Association of Pension Funds (NAPF) chief executive Joanne Segars said: "We welcome the focus on value for money but caution that charge caps are just one aspect of good value in defined contribution schemes, along with appropriate default funds, good governance and clear communications.
"We do not think that the Government's recommendation for provider-level independent governance committees goes far enough and risks not being aligned with the long-term interests of scheme members. We believe employer-level independent governance committees would work better for scheme members."
She added: "The reforms to pensions announced in the Budget are still being digested but it is abundantly clear that pension schemes will be expected to deliver the lion's share of those changes in the coming months. We fully support steps that give pension schemes the freedom to offer their members appealing and good value ways to save for their retirement, but the right timescales and proper guidance need to be made available to pension schemes so they can provide their members with a consistently high quality service."
Capita Employee Benefits head of DC consulting Gary Smith said that he welcomed the cap "in principle" and said that as larger employers currently enjoy a much lower charge than 0.75%, the charge cap may become a 'target' for pension providers to work toward as opposed to a maximum threshold that should not be exceeded.
He added: "Given the recent announcement that those approaching retirement will receive guidance – under the 'guidance guarantee' – and, as the delivery of this guidance will be either from the trust or the provider, it may be that larger employers see their charges rise to accommodate the cost of this new duty."
Buck Consultants head of pensions policy Kevin LeGrand said: "On the face of it, the extensive package of reforms proposed are welcome in principle in their aim to address the weaknesses in the system identified by previous reviews. The DWP appears to have listened to expert advice regarding governance issues, but resolving one may simply create a new issue elsewhere."
Broadstone pensions consultant David Brooks said: "A charge cap is good for consumers currently being auto enrolled into a pension scheme and the announcement does give much needed certainty to proceedings.
"However, we would still question the relevance for schemes being used for auto enrolment as employers will be able to achieve this target with relative ease. The pensions market, unlike the energy market, is very competitive. The big question now is what next and all eyes are on the providers."
CBI director for employment and skills Neil Carberry said: "We do not think capping fees at this level is wise, especially as schemes will now have to provide expensive advice to every member following last week's Budget."
Deloitte insurance partner Andrew Power said: "A charge cap on default funds can play a role in dealing with charges that are clearly extreme. However, the cap will only really affect very small or very old schemes, as newer schemes, and those of mid-size or above, have charges that are already below the cap levels."
He added: "The real issue continues to be ensuring a competitive market in an environment where the ultimate beneficiaries of lower charges, the employees, are not the decision makers in scheme design and charging."
IncreaseYourPension.co.uk founder Craig Palfrey said: "Far from allowing more freedom with their money, this announcement spells bad news for the industry as a whole, both for potential investors and fund managers alike. There is now little incentive for schemes to offer investment choice for fear of looking expensive."
Aon Hewitt DC consultant Debbie Falvey welcomed the charge cap announcement and said: "It will be interesting to see how these changes - whereby members are required to opt in to advice - will interact with the need to make/understand the new retirement options set out in the Budget."
JLT Employee Benefits CEO Mark Wood said: "The Government's introduction of a charge cap has been long mooted and we welcome the pragmatic action being taken."
First published 28.03.2014
monique_simpson@wilmington.co.uk
