Insurers warn over Government cap on pension plan charges

But 0.75 per cent limit is welcomed by consumer groups and advisers

The planned cap on charges on workplace pensions will drive small schemes out of business and give workers less financial freedom, insurers warned yesterday.

The announcement by the pensions minister Steve Webb that a charge cap of 0.75 per cent will be introduced for auto-enrolment workplace schemes from April 2015 prompted anger in the industry.

Mr Webb promised: “We are going to put charges in a vice – and we will tighten the pressure year after year.”

But Kevin LeGrand, the head of pensions policy at Buck Consultants, said: “If the pensions charge cap becomes too tight, something may have to give. The outcome may be to increase the pace of the current trend to drive small and bespoke schemes into oblivion, resulting in all workplace pension provision being at the lowest common denominator level.”

The Department for Work and Pensions had consulted the industry and consumer groups on whether a cap should be introduced – and, if so, whether it should be set at 0.75 per cent or 1 per cent. Mr Webb has long made it clear that he favoured a cap on charges, so it seemed inevitable that it would be brought in.

As well as the cap on fees, the Government said it will ban sales commission being deducted from pensions, outlaw increases in charges for those who leave a company but remain in the pension scheme, and ban charges for advice given to employers by a pension provider.

The cap was welcomed by consumer groups such as Which?, which pointed out that paying a 1 per cent rather than 0.75 per cent annual charge could cost a saver nearly £40,000 over their working life.

Tom McPhail, the head of pensions research at Hargreaves Lansdown, also welcomed the move, saying: “It is vital that pension scheme members have confidence that their workplace pension will give them good value for money. The charges cap addresses that issue and means that even if they can’t afford a Lamborghini at retirement, at least pension investors won’t be helping to pay for the fund managers’ new sports cars.”

But the moves left several senior providers disappointed. Malcolm McLean, a senior consultant at Barnett Waddingham, said: “A 0.75 per cent cap will obviously limit the ability of employers to choose a scheme that may well have higher charges but delivers far better outcomes for their staff. On the commission ban, this will be seen as a huge blow to advisers, which some estimates suggest could cost them £150m and 1,000 jobs.”

Darren Philp at The People’s Pension said: “The Government has missed a huge opportunity with this consultation. Instead of cleaning up pensions, it has sanctioned more complexity that will just create more confusion.”

However Philip Smith, a director in the defined-contribution team at the accountants PwC, added: “A cap ... is another important step towards simpler and more transparent pension schemes and should go a long way to help rebuild trust in pensions as a long-term savings tool.”