The Government’s plans to cap fees paid by savers in pension schemes could end up costing the insurance industry £1bn, the chief executive of the mutual Royal London has warned.
Phil Loney attacked the overhaul, spearheaded by the Pensions Minister Steve Webb, as a “back-door tax” and a “headline-grabbing policy” that would ultimately lead to fees being heaped on employers rather than individuals. He said this could end up hitting contributions made by companies.
From April, the Government plans to cap the annual charge for managing an automatically-enrolled pension pot at 0.75 per cent of the funds being managed, in what Mr Webb has described as a “full-frontal assault” on pension fees.
The Office of Fair Trading estimates that more than 186,000 pension pots, with £2.65bn worth of assets, are subject to an annual charge above 1 per cent.
The Pensions Minister has estimated that the industry’s revenues would be reduced by £200m over 10 years, but Mr Loney said the actual sum could be five times this.
“The provisions for the pension charge cap that we have seen from pension providers during this reporting period suggests that this is a gross underestimate,” Mr Loney warned. “This seems to me to be an unacceptable margin for error in the Government’s understanding of the impact of its actions, and the size of the impact is driving many insurers to introduce employer fee arrangements to mitigate against the impact of further reductions in the price cap.”
Tom McPhail, the head of pension research at Hargreaves Lansdown, agreed with Mr Loney and said insurance companies were “making provisions to cover the cost of the price cap which dwarf the Department for Work and Pensions’s original estimates”.
“The DWP’s analysis was branded as not fit for purpose and we’re now seeing the consequence of that. Our fear is that employers will end up picking up the bill for this.”
The industry also faces separate reforms announced in the March Budget by the Chancellor, George Osborne. These will give savers more freedom with pension pots from next year, ending the requirement to buy an annuity when they retire.
Mr Loney’s comments came as Royal London, which sponsors England one-day cricket, saw pre-tax profits halve to £136m with a £61m writedown on future profits as a result of the cap. On an operating level, profits rose 8 per cent to £110m.
A spokesman for the DWP said: “We’re taking action to ensure workers have access to good quality pension schemes, protected from high and unfair charges.
“This is important as automatic enrolment will lead to around six to nine million people newly saving or saving more into a pension, generating an extra £11bn a year in pension savings. These people must be able to save for retirement with confidence.” He said the cap would transfer about £200m from the pensions industry to savers over the next 10 years.Reuse content