Legal & General Pensions Strategy Director, Adrian Boulding responds to today’s announcement from Steve Webb to introduce a pension charge cap.
“Choosing a pension scheme with 0.5% charges rather than one on the Government’s cap would get employees an extra £50 per week pension, taken over a lifetime of saving. Employers and trustees have a clear moral duty to try and get this extra value for their members.”
“People aren’t retiring with large enough pension pots, and one of the reasons is high charges. We would have liked the Government to have capped auto-enrolment default schemes at 50bps, but we welcome the direction of travel and believe the Government’s vice will tighten over time to allow savers to achieve the biggest pension pots possible.” says Adrian Boulding.
We welcome the ban on Annual Member Discounts (AMDs) and commission charges, but we urge employers and trustees to shop around for new AE schemes and to seek better value for legacy schemes sooner rather than later. Delaying will cost their members valuable savings, which could prevent them from having the retirement they desire.
Legal & General remain committed to providing good value default pensions for auto-enrolment for which customers do not have to pay more than half a per cent a year in charges. The company also believes that legacy pension charges should also be driven down to end the practice of higher charges for schemes set up before 2001. We await the Government’s report into legacy schemes and expect them to treat their members in the same way that they are treating members enrolling into new AE default schemes.
Adrian Boulding, Pensions Strategy Director at Legal & General, commented; “We are pleased the plans announced today will put an end to unfair charges, such as AMDs and commission charges, and tackle legacy schemes with high charges, all of which can cause major damage to employees’ retirement savings over a lifetime of saving.
We welcome the introduction of Independent Governance Committees for DC schemes, which alongside Mastertrust trustees are now charged to work for the best interest of their members, whether in a new scheme or a legacy scheme.
This will enable them to opt for value for money schemes that may be charging only two thirds of the level of the proposed 0.75% charge cap.
Around £30 billion of savings in old (pre 2001) and other high charging contract and bundled-trust pension schemes that may not be achieving value for money by the standards of modern DC workplace pension schemes. That’s exactly what we are offering to employers staging with us in 2014 and to existing customers moving across to our Workplace Pension, which charges half a per cent for default auto enrolment
Today’s announcement by the Pensions Minister opens the door for Trustees and IGCs to root out high unfair charges and tackle high charges on legacy pensions.
Next month 1.7 million employees, who are working for an employer who already has a company pension scheme in place, will be automatically enrolled into their existing (legacy) company scheme for which average charges are 0.79% (OFT estimates). These employees will pay £4.3 billion in higher charges in a legacy pension scheme.”
How these figures are calculated:
- DWP consultation document shows that over a lifetime of saving a scheme with charge of 0.5% rather than 0.75% will pay out £40,500 more which equates to £49.20 per week pension using Money Advice Service annuity calculator.
- In the tax year 2014/15, 41,000 employers containing 3.8 million people will reach their automatic enrolment staging date (source: The Pensions Regulator).
- Of these, 16,000 employers containing 1.5 million employees have no existing pension scheme (source Making Automatic Enrolment Work Review). They will arrange a new scheme in the pensions market, where charges are now capped at 0.650%.
- However, the other 25,000 employers containing 1.7 million AE eligible employees already have a pension scheme (source Making Automatic Enrolment Work Review). These typically charge 0.79% on average (source OFT market study of workplace pensions).
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