The Department for Work and Pension (DWP) has launched a consultation outlining plans on a charge cap of 0.75% in workplace pensions.

Other options that are being considered in the consultation include a higher charge cap of 1% of funds under management, or a two-tier 'comply or explain' cap, where there would be a standard cap of 0.75% for all qualifying schemes and a higher 1% cap would be available to employers who reported to the Pensions Regulator (TPR) why the scheme charges in excess of 0.75%.

Alongside the pensions cap, the Government said that it wants to increase transparency in the pensions sector, to help small and medium sized businesses to make an informed choice when choosing their employee's pension scheme.

Pensions minister Steve Webb said: "The Government believes that enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges."

He added: "I'm confident that we will make the system fairer for anyone being automatically enrolled into a workplace pension and will finally address the issue of charges which has been neglected for far too long."

The Government said that the reforms will reduce the charges on pension schemes used for auto-enrolment and that this is a "crucial step" in improving value for money for consumers.

Up to nine million people are expected to open new pensions as part of the scheme, increasing the amount being saved in to workplace pensions by around £11bn per year, DWP said.

According to the Office of Fair Trading (OFT), although the average charge on new pension schemes is around 0.51%, there are over 186,000 pension pots with £2.65bn assets that are subject to an annual charge of above 1%.

If someone saves £100 per month for 46 years they could end up losing almost £170,000 from their pot with a 1% charge, and over £230,000 with a 1.5% charge. That person could end up with an additional £100,000 with a 0.75% charge compared to a 1.5% charge.

The Government is asking for industry and the public's view on how best to design a cap that protects savings.

The National Association of Pension Funds (NAPF) has welcomed the Government's consultation.

Helen Forrest, NAPF head of policy and advocacy, said: "The NAPF wants to see pension schemes that offer quality and value for money to scheme members.

"Charges should be seen as part of a bigger picture that includes quality of services provided to savers through their working life and a robust investment strategy that generates good returns."

TUC has also welcomed the Government's plans to cap pension charges.

Frances O'Grady, TUC general secretary, added: "It will be just as important to make sure that there are no charges hidden away in the management of scheme investments, no charges going as commission to consultants and no hidden penalties for savers who are no longer contributing to the scheme - the so-called active member discounts. In the longer term we want the charge cap to be reduced to 0.5 per cent - the level that good schemes like NEST already charge."

CBI director of employment and skills Neil Carberry said: "Businesses across the country want low cost schemes for staff. Greater clarity on charges is the best way to achieve this.

"Though the recent OFT report on pensions did not conclude a cap was necessary, introducing one for automatic enrolment schemes may be helpful if it is set at the right level.

"Given average pension charges are currently at historic lows, it's important that any cap doesn't have the effect of levelling charges up."

The Government also said that it is keen to design a series of transparency measure that will make it easier for employers to compare schemes, so that they can secure the best outcomes for savers.

Gina Miller, founder of The True and Fair Campaign, said: "Restoring confidence in the pensions and investment system requires nothing less than total transparency on all fees and charges; not a cap on just one element of costs.

"Politicians have a vital chance to improve and simplify the pensions system and any action to reduce the cost of pension funds has to cover all fees and charges, not just the headline Annual Management Charge. Many of the costs that pension savers face are 'hidden' and that is where action is most urgently needed. Politicians need to stop tinkering and bring in fundamental change."

Regarding DWP's aim to increase transparency, Forrest said: "The NAPF believes that transparency, good governance and scale are important in ensuring good member outcomes. The NAPF will be responding to the Government consultation."

First published 30.10.2013

monique_simpson@wilmington.co.uk