Pension fees cap could add £1bn to savers’ pots
A cap on excessive pension charges could boost savers’ retirement funds by £1 billion – five times more than previously estimated – one of Britain’s largest insurers indicated yesterday.
Pension fees will be capped at 0.75pc a year next April under a Government initiative to tackle “rip-off” levies that deplete customers’ savings.
Ministers initially said this new ceiling would transfer £200 million from insurance company profits “into the pockets of savers”.
But Royal London, which has 11 million customers, calculated that the sum passed to savers by the industry would be “monumentally higher”.
Phil Loney, chief executive of Royal London, said: “We estimate the total reduction in long-term insurer income may well reach £1 billion.”
The cap on charges, which takes effect in April 2015, will apply to workplace pensions linked to the stock market.
Pension companies such as Royal London take annual fees for managing money saved into company schemes. The charges can range from below 0.5pc a year to more than 2pc. Reducing the higher charges to 0.75pc will allow savers’ funds to grow more quickly to the detriment of pension providers. Royal London profits fell by 49pc the first half of this year as the firm acknowledged it will take less from savers each year.
David Norman, a campaigner on charges and founder of asset manager TCF Investment, said: “The ordinary saver is entirely justified in thinking – hurrah, this serves the pensions industry right.
“If on average consumers lose less from their pots in charges, we will all be richer. After all, pensions were not designed to make profit for insurance companies but for savers in old age – at least, that’s how it should be.”
Justin Modray, founder of Candid Financial Advice, said: “Some of the charges on older pensions were little short of criminal and were only there to pay excessive sales commissions.
“Things have gradually improved over the years but there is no doubt some pensions remain too expensive. Insurers are paying the price for treating customers poorly over several decades.”
However, some commentators warned that reducing charges so quickly could have unintended consequences.
Mr Loney said the charges cap could do more harm than good, indicating that Royal London and similar providers might hit employers with supplementary fees. These would fall outside the 0.75pc government cap, which relates specifically to the management charges paid by staff.
Tom McPhail, head of pensions at financial services firm Hargreaves Lansdown, said extra fees outside the cap would be passed on to customers and shareholders.
“There could be a sort ‘money-go-round’ where insurers put extra charges on employers, who pass these on to staff in the form of lower pay rises and to shareholders in the form of smaller dividends.
“If that happens there will be little overall benefit to the people the Government is trying to help.”
Gina Miller, a campaigner for fairer investing and founder of wealth manager SCM Private, said: “The charges cap must include all implicit and explicit costs or it will be misleading.
“There will be a cost to [insurers] putting their houses in order, but they have no one to blame for this mess but themselves.”
A spokesman for the Department for Work and Pensions said: “We’re taking action to ensure workers have access to good quality pension schemes, protected from high and unfair charges.”
The spokesman said this was vital because of a large growth in the number of people saving into pensions. Figures last week showed an additional four million people have been enrolled automatically into a pension scheme under a government initiative to boost retirement saving.
Between six and nine million people would be saving into a pension for the first time by 2018, the DWP said, generating an extra £11 billion a year in savings.
“These people must be able to save for retirement with confidence,” the spokesman said.
Personal finance – How to grow your wealth and spend less – Telegraph
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