Consumer watchdog the Office of Fair Trading has accused pension firms of ripping off retirement savers by wiping billions from their investments in charges.
The OFT has issued a hard-hitting report that blames the industry for charging up to 18 different fees to savers that are both over complicated and unwarranted.
The result is pension firms have snatch around £27 billion from workers saving hard for retirement.
The inquiry disclosed 1.4 million investors are paying 26% more in charges than other retirement savers just because they started their pension before 2001.
Pension analysts claim that over the typical 40 year working life of an individual, this charge alone would add up to the £27 billion.
Pension industry disgraced
In a 175 page, the OFT disgraces the industry’s charging structure, working practices and accuses the firms of ripping off retirement savers.
The OFT says 14% – one in seven schemes – managing £40 billion of retirement cash offer poor returns on investment.
The OFT also called on the government to pull back from capping pension charges at 1%, because the move would set a level for firms to charge regardless of what they did for the money – and the fee could cost retirement savers a total of 21% of the pension fund over their working life.
The watchdogs also urged the government to urgently investigate pre-2001 pensions that the OFT claims offer poor value to retirement savers.
The pension industry trade body, the Association of British Insurers (ABI) has volunteered to draft explanations of charges for pension savers, but claimed the work would take at least a year.
The move is seen as a sop to consumers and the government in a bid to stave off tougher legislation limiting pension charges and tightening up how schemes are managed.
The report was sparked by concerns over fees in new auto-enrolled pensions.
How fees hit savings
OFT chief executive Clive Maxwell said: “Although we have stopped short on referring pension firms to the Competition Commission, we believe there are problems on firms competing on charges and efficiency to give retirement savers value for money.
“As a result, the government and regulators will look at the industry and work out ways of making sure savers get better returns on their investment.”
The report reveals pension management fees have dropped from an average 0.79% to 0.51% since auto-enrolment started at the end of 2012. However, the highest fee is 2.3% and the lowest 0.05%.
Small percentage changes in fees can have massive results on pensions.
A management fee of 0.5% cuts the accumulated savings of a typical employee from £440,134.75 to £390,201.78, while a 1% fee shrinks the pot to £346,670.16.
