As part of a two-sided attack on pension charges, the UK Government has finally proposed to limit default fund charges as well as ban consultancy fees for workplace pensions. The new initiative was introduced in order to increase confidence in the pension savings system as well as provide comfort that workers will get a good value for their money and charges are an important part of that.
Why now? The Pensions Bill, which has been published last week, will give new powers to the Government to take tougher positioning on pensions in work places. In addition, this important step to ban consultancy charges has emerged as a result of a six-month review by the government which found consultancy charges, paid to pension advisers for setting up and overseeing pensions, can take out large portions of pension savings and negatively impact those workers who have frequently change jobs.
How does this apply to you? The Government will promptly ban consultancy charges on the ‘auto-enrolment’ pensions where a pension member’s money is automatically invested if they do not choose another investment option. The auto-enrolment rule will put some 11m employees into pension schemes for the first time in the upcoming years.
At present, employees have no control over consultancy fees charged. The employers are currently allowed to pass on costs charged by consultants, who advise them on choosing and managing a pension scheme, to their employees. The charges can run into thousands of pounds and scheme members effectively end up paying for advice given to their employer. Under the new proposed rules, employers will continue to be able to use services of consultants – however they will no longer be able to pass on these costs to the workplace pension schemes.
In April this year a research consumer group Which? found that companies are letting consultant fees to take up as high as 50% of workers’ savings in their first year of paying into the pension. The consultants’ fees could be as high as £450 per staff member in the first year and then up to 7.5% of their pension pot for five years after.
In his statement, Pensions Minister Steve Webb said: ‘With millions of people taking up pension saving for the first time under automatic enrolment, we have to give people confidence that they will get good value for money. He added: ‘That is why we are banning consultancy charges, where scheme members end up paying for advice given to their employer. In addition, the OFT (Office of Fair Trading) is investigating the whole workplace pensions market and we will act promptly and vigorously late this year in the light of their findings.’
The proposed revisions will apply to defined contribution (DC) pension only, which most employers operate, but not defined benefit (DB) schemes. The Pensions Minister has also revealed that the Government is considering proposing a charge limit on all workplace defined contribution pensions to ensure the savings of the members are not unfairly impacted by provider administrative fees. The Government is expected to publish a consultation brief later in the year with advice on how to tackle excessive charges in other workplace pensions.
Do you have any questions or concerns about your current pension scheme? Feel free to get in touch with one of our experienced advisors for professional and impartial advice.