Writing in the Daily Telegraph, the Pensions Minister Steve Webb announced this week that he will not hesitate to take action against the "sky-high charges" which are "tearing the heart out of people's pensions".

He said it was time to deal with the tarnished reputation of the UK pensions industry and that the government would focus on charges in default funds. In the article Webb urged providers to offer fairer terms to members of legacy schemes which charged high standard costs and even higher exit penalties.

Talking about to auto-enrolment, which will see 10 million new people start to save for their pensions starting later this year, Webb said that the government is fairly up to speed on which providers the biggest companies have chosen.

He said these are overwhelmingly schemes with annual management charges around 0.5% - "very low by historic standards, and well below the 'stakeholder pension' cap that was set by the previous government. And the new not-for-profit National Employment Savings Trust (NEST) will provide pensions at an equivalent cost of around 0.5% per year."

Webb said that this is a trend he sees; in general charges are coming down "dramatically". But what to do with those who charge too much?

"We also need to look at the legacy of pension schemes where people are 'locked in' to high cost pensions with exit penalties for moving their money out. I would like to see the leading companies look again at their 'back book' of old pension policies," he said.

"Government can ban a scheme from being used for automatic enrolment if its fees are too high or if members are required to pay for anything which doesn't deliver them a pension benefit," Webb writes. "We could take action within months so the industry has every incentive to do the right thing here." He said the government will especially be watching the costs of default.

Solving the problem by capping charges is not a straightforward process, he explains: "There is a risk that the cap becomes the norm and lower charges are levelled upwards. It is also not easy to decide which costs should be included in the definition of the cap."

But though the minister says that it is difficult, the government does have the power and will Webb says they "will use them if consumers need that protection".

First published 23.07.2012

azeevalkink@wilmington.co.uk