Proposals to cap auto enrolment pension charges at 0.75% could lead to retirement savers paying up to £4.3 billion in unnecessary fees and charges, says the chief executive of a leading pension firm.
Legal & General is urging the government to reconsider by warning 1.7 million pension savers in legacy schemes will pay a high price if the plans go ahead.
The firm’s CEO John Pollock argues the limit will not drive down costs but may set a fee target rather a threshold.
Number crunching by the financial firm reveals how the 0.75% pension charge cap put forward by the government will affect 3.8 million workers auto enrolling in workplace pensions from April 2014 – when the charge cap is set to start.
In April, around 1.5 million people working for employers without a company pension scheme will join a new auto enrolment scheme charging annual management fees of 0.50% or less, with a default investment of a low cost fund.
Poor idea
Another 2.3 million working for employers with a company pension scheme with average charges of 0.79%.
Legal & General reckons three out of four of these workers – numbering about 1.7 million, will be automatically enrolled into their legacy company scheme. These retirement savers will pay the higher charge until they retire – in an average 22 years’ time.
The firm points out that the Department of Work and Pensions reckons at a 0.25% higher charge will cost these employees around an additional £2,500 each, which would amount to £4.3 billion over payment during a lifetime of saving in a legacy pension scheme.
Pollock said: “Setting the pension charge cap at 0.79% is not a good idea from the government.
“It does nothing to make pension costs cheaper, while 1.7 million workers without a pension enrolled into their existing company schemes will collectively lose £4.3 billion of retirement savings.”
Employees let down
Pollock explained the Office of Fair Trading suggests a new auto enrolment scheme should charge a 0.51% fee.
“A higher charge for these legacy schemes penalises pension savers contributing to them, while having no affect at all on new schemes. It’s unfair to the 1.7 million workers who will have to contribute into them.
“We prefer a cap of 0.5% for all auto enrolment schemes. Competition and the fees cap for new schemes is making saving cheaper and easier for millions, but will let down employees forced into legacy pensions.”
