Pension charges, the government, retirement and you

21st May 2013

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Pensions minister Steve Webb is taking bold steps to ensure better protection for workplace pensions from unfair charges by banning consultancy charging.

Consultancy charges, levied by pension firms which advise employers on their workplace schemes, Webb believes, could substantially erode the value of worker pensions.

In addition, with a lot of talk in the press about fund management charges on pensions being too high, the minister has also threatened to cap charges on what is known as the default pension fund, the scheme employees end up in if they do not actively select another fund on offer. This will go out to consultation in the autumn following on from an Office of Fair Trading look at competition among defined contribution workplace pensions.

But at the moment, the big news is that advisers can charge this way. The writing was probably on the wall, when consumer group Which? surveyed the market and found at least a chance for very high charges reported here on the FT.com.

Which? found suggested fees of £400 per scheme member, spread over the first year, and ongoing annual charges of £5. Under this fee structure, it calculated that a saver contributing £100 a month would see their first year’s savings reduced to just £795. It found that in some cases these fees could rise to £450, plus 7.5% of all contributions for the first five years, were also discussed. For those on low earnings, it certainly suggested they could see their early pension contributions come in at a very low level.

Is this all good news? Hopefully

The UK is currently undergoing a pension revolution, albeit a slow one, via auto-enrolment. Many people who have never had a pension hopefully soon will do. Starting with the biggest employers last October and rolling out across the whole workforce, workers will be automatically enrolled into a workplace pension unless they have actively decided not to join, with the enrolment process repeated every three years – hence the name auto-enrolment. By 2017/2018 employers will have to contribute 3% provided workers save 4%. The government tops this up with an extra 1% from tax relief. Employers by law must offer a scheme. And this is where some of threat lies, as employers seek new ways to finance this, as the commission system, which used to help, was abolished at the turn of the year.

Rather than receive commission from providers and fund managers, a system which applied in both in the retail and workplace pension markets, they now must agree charges with the client. However, in the workplace market, your employer is the “adviser” i.e. charges for advice would be agreed between worker and employer but would, to all intents and purposes, come out of the worker’s pension.

The financial watchdog – formerly the Financial Services Authority – now called the Financial Conduct Authority – said that no charge could take the overall contributions below 8%. Now, this year, the pension minister has banned the concept altogether. If an employer wants help from an adviser, he or she will have to pay a fee. This is, mostly, good news.

But there are downsides

Pension advisers, some of whom at least supported some aspects of the consultancy charging system, say there could be some downsides. Employers are now more likely to select an option for the workplace pension which is very simple to implement, suggesting workers are likely to be in the government backed scheme, dubbed NEST. Some advisers say it has more limited investment options including embracing a very conservative default investment strategy for younger members so as not to put them off because of stock market losses. Most experts suggest that young members are the ones who should actually be taking more investment risk. Nest arguably sets this strategy to minimise the numbers of less financially aware members opting out of the pension if they suffer market falls, but this advisers argue risks lower returns and thus lower eventual pensions in the process. Their recommendations might include Nest but not always.

The pension advisers and some established pension fund providers also argue that when advisers are involved more people are likely to stay opted in – good for the country and society large – and that employers are more likely to see the pension as a valuable employee benefit helping recruit and retain staff rather than as a new obligation and so they might pay more in. That is clearly good for any scheme members too.

For upcoming pension members they need to consider where they stand on the low cost versus value for money argument when it comes to choosing fund and pension fund managers. It is also true that whatever happens, it is not workers but employers who selects the workplace pension. Workers should talk to their employers about their options, and do so quickly if they want to influence the choice.

There are a host of other issues to think about. Employers, already offering a more generous scheme may cut their contributions to match the government’s minimum. Savers, with some investments already, may need to think what this all means for their overall investment strategy. The better informed the worker is, the better off they are most likely to be when they come to retire. And that is the thing to really concentrate on.

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