28th November 2013
Pension firm Legal & General has warned that 1.7m pension savers could end up paying £4.3bn in extra charges if the Government sets the planned cap on pension charges too high.
What Legal & General means by too high in this case is 0.75% which is actually at the bottom of the Government’s proposed range. L&G would like to see charges capped at 0.5%. The firm notes that the Office of Fair Trading found that new schemes are coming in at charging levels of 0.51% in 2012. However L&G says that in cases where a pension scheme already exists many new savers could be opted in to a higher charging contract at an average of 0.79%. That is why it wants a cap set at a lower figure.
The DWP consultation ends today but L&G has wheeled out the big guns to keep the pressure on the Government.
John Pollock, Legal & General Assurance Society chief executive officer, says: “A pension charge cap at 0.75% is a poor idea by the government. Not only will it potentially cost legacy scheme pension savers £4.3bn in lost savings, it will also be ineffective in driving down pension charges for millions of savers. The Office of Fair Trading says that a typical new auto enrollment schemes actually charge 0.51%. Having a cap at a much higher figure will have no impact on new pension schemes, and will result in legacy savers being treated unfairly compared to new savers. Legal & General is in favour of having a meaningful cap at 0.50%, not only for new auto enrolment schemes, but for legacy pension schemes as well. It is here in the legacy world that savers maybe getting a poor deal, with fees at much higher levels. Competition is driving down the cost for new auto enrolment schemes, but is having no real impact on legacy schemes because employers have historically rarely switched suppliers.”
L&G says 2.3 million are working for an employer who already has a company pension scheme in place, for which average charges are 0.79% (OFT estimates). It estimates that around three quarters* of these employees – 1.7 million, of whom the majority are not already paying into a company pension, will be automatically enrolled into their existing (legacy) company scheme. These employees will pay the higher charges until they retire – on average around 22 years.
Given that the DWP estimates that a 0.25% higher charge will cost these employees (1.7million) around £2,500 each, this would amount to £4.3 billion over payment during a lifetime of saving in a legacy pension scheme.
* 2.3 million employees reduces to 1.7 million allowing for those who will not be eligible to be auto enrolled or might ‘opt out’.
Some pension providers do not agree with L&G and it does, of course, play to its business model. Its charges come in under the 0.5% for the main default fund which most investors choose (by default). Some pension advisers say that it means that most pensions will be invested in passive funds which tend to be cheaper.
And of course, while a low cap suits employees, it could cause problems for employers as Towers Watson has warned. Some providers may not want want certain employers’ business – even if already agreed – if there is a low cap, because they may not be able to service the fund profitably. But the Government will decide soon and employers and employees will then know where they are. In the meantime, L&G has certainly nailed its colours to the low cost mast.