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Counting the cost of delay: Savers face £340m hit over ‘painfully slow’ charges reforms

The Government’s “painfully slow” progress on high charging pension schemes could cost savers hundreds of millions of pounds, Money Marketing analysis reveals.

High charging pension schemes were thrust back into the spotlight last month when an audit revealed up to £26bn of assets are subject to fees over the 0.75 per cent auto-enrolment charge cap.

Rather than calling for immediate action, the audit said providers need to do their own investigations and justify higher fees by June. In turn, any changes should be implemented by December.

Based on the audit’s worst-case scenario, a delay of a year on bringing down costs could mean members pay an extra £341.4m ­in charges, assuming providers eventually cut fees to the same level as the auto-
enrolment cap.

Growing public anger at what are perceived as “rip-off pensions” and May’s general election means political pressure on providers will ratchet up in the coming months.


Following the audit, pensions minister Steve Webb said he was “genuinely shocked” and revealed he would be hauling firms in to explain themselves.

“I am going to talk to them all one by one and challenge them to come up with big, bold solutions,” he said.

But the Government is facing calls to accelerate the pace of reform.

Labour shadow pensions minister Gregg McClymont says: “£340m is a huge amount of savings being syphoned from hard-pressed people if the Government continues to delay. These charges are a scandal and the Government must act now on this report to end these rip-offs. It’s time for the Government to act to protect savers who do the right thing, work hard and save.”

Barnett Waddingham senior consultant Malcolm McLean says: “It is good to see we now seem to have at last some comprehensive data and analysis from the Independent Project Board as to the extent of the problem and the savers most at risk. But progress towards addressing this issue has been and continues to be painfully slow.”

Some schemes have valuable guarantees embedded in the terms and rules that could justify what can initially look like extortionate fees. But will politicians and regulators be forced to act under growing pressure from national newspapers and the public? And could it be savers are the ones to lose out as a fixation on cost overrides all else?

Legacy audit

The audit was commissioned by the Association of British Insurers in the wake of a damning 2013 Office of Fair Trading report into defined contribution workplace pensions.

The industry avoided being ref-erred to the Competition Commission by agreeing to set up independent governance committees and running an analysis of all schemes with annual management charges over 1 per cent.

An Independent Project Board made up of representatives from the ABI, the FCA, the Department for Work and Pensions and The Pensions Regulator, and chaired by Caroline Sergeant, ran the audit and found up to £25.8bn of assets potentially exposed to member-borne charges over 1 per cent.

Members most likely to be affected are those with small funds they are no longer contributing to, the report says. It says: “The majority of the assets under management potentially exposed to charges over 3 per cent (£0.7bn out of £0.9bn) is held by savers with pots of less than £10,000.”

From April, default fund char-ges for auto-enrolment qualifying schemes will be capped at 0.75 per cent while active member discounts and adviser commission will be outlawed from April 2016.

However, it is not only older savers who are subjected to high fees.

Nearly half a million members have joined schemes charging over 1 per cent in the last three years des-pite the Government cap on auto-enrolment scheme charges coming into force in just a few months’ time.

The audit also found £3.4bn of assets with potential exit charges of 10 per cent if savers leave contracts early.

Out of date

Pension providers have hit back at the report’s findings, saying the 0.75 per cent charge cap has already begun changing behaviour and that the information used is out of date.

Aviva head of pensions policy John Lawson says the report focused on “worst-case scenarios” and assessed data from April 2014.

He says: “Since then, most firms have announced a charge cap. Aviva has already capped charges on all auto-enrolment schemes and in 2001 we capped all charges on group personal pensions at 1 per cent or less.

That will have had a major effect on bringing schemes back into line.”

But Government older workers business champion Ros Altmann says: “The fact that future schemes have the charges cap isn’t the point.

“The people saying things have been addressed are probably not the people most guilty of the worst practices highlighted by the study – that’s my worry.”

Altmann says the survey only covered a portion of the workplace market and “there’s the risk the situation is worse in the personal pensions market”.

Value for money

Lawson says the IPB did not do enough research into the benefits of schemes with higher charges. He adds it is these benefits – such as guaranteed growth rates – that explain why 407,000 people joined
expensive schemes over the last few years.

He says: “Employers turn over staff quite frequently – turnover’s something like 14 or 15 per cent across the UK. Therefore if you’ve set up a scheme 20 years ago with guaranteed growth rates, you’ve kept that scheme open because it is advantageous for members. That’s probably the reason why people joined recently. If those schemes have higher charges, and some of them will, it’s got to be seen against the benefits.”

But Altmann argues these schemes are the exception. “It’s another smoke screen, it’s not addressing the main problem,” she says. “Obviously, it will be important to look at the detail but it’s only a small minority of schemes that had guarantees, about 10 per cent maybe, that doesn’t explain the 90 per cent that don’t.”

Exit charges

Charges levied on pension pots when a member leaves a scheme early are particularly contentious. The debate centres around customers being treated fairly and businesses having to forego revenue factored in many years ago.

McLean says: “With April now looming, the problem of high exit charges surely cannot be allowed to continue. The most shocking statistic to me in the IPB report is that which shows there is
around £3.4bn of assets under management with potential exit charges of 10 per cent if savers leave their scheme today.

“Of this, £0.8bn is held by savers over age 55, who will be eligible to withdraw their pension savings from April.

“I know all the arguments about recovery of upfront paid commission and that you cannot normally unilaterally tear up a contract but in the interests of everybody, including the providers themselves, there needs to be an amnesty declared from April on exit charges from legacy schemes.”

But Aegon regulatory strategy dir-ector Steven Cameron says while exit fees may be out of date, they are necessary to preserve equality bet-ween customers.

He says: “Rationally, if you don’t charge those who leave early, other customers will have to pay. It would be rare to find a brand new contract written with an exit fee in it. If you try to unwind everything from the past, when you’ve got long-term contracts that create equity over time, it’s very difficult.”

Despite the rationale, exit fees are an easy target for politicians keen to be seen as consumer champions and providers will inevitably come under pressure to revisit contracts.

Webb has also hinted at extending the Government’s plans for pot-follows-member so pots are automatically moved from higher charging schemes to those within the cap. Cameron warns the Government will have to tread carefully to ensure members do not lose valuable benefits.

Ultimately it will be up to the new independent governance committees to determine whether schemes are offering value for money. But if they do not move fast enough they will soon find their independence called into question.


Adviser view

Susan Hill, chartered financial planner, Susan Hill Financial Planning

Nearly every old plan I look at has much higher charger than I can do. Wherever I can I will move legacy plans, but to move them I have to look at the capital unit. If you move then you get these really high encashment penalties.

If only the FCA would do something about this, make providers cancel these units then it would be so much easier. Most of these old plans can’t be put into drawdown and can’t take advantage of freedom. Now the reforms have happened, the FCA need to sort this out.

Legacy audit – key facts


£67.5bn of assets, or 64 per cent of the assets in DC workplace schemes, excluding unbundled trust-based schemes. All pre-2001 schemes were in scope, and post-2001 schemes with more than one type of charge, or where charges paid by members (excluding transaction costs) exceed 1 per cent.


  • Between £23.2bn and £25.8bn of AUM potentially exposed to a reduction in yield of more than 1 per cent. Around £13.4bn is potentially exposed to charges above 1.5 per cent, between £5.6bn and £8bn exposed to charges over 2 per cent and up to £0.9bn greater than 3 per cent.
  • 407,000 savers joined high charging schemes in the last three years
  • £3.4bn subject to potential exit charges of 10 per cent.
  • Audit found 38 different types of charges.

Next steps

  • IPB has asked providers to review, and justify, their high charging schemes by 30 June 2015.
  • Trustees and Independent Governance Committees have until January 2016 to make recommendations and agree an implementation plan with providers.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Isn’t this an extension of the FCA’s botched and now seemingly kicked into the long grass review of legacy schemes and policies going back many years? The first thing that should be looked at are the contract terms and whether or not certain providers are taking unreasonable advantage of woolly wordings that allow them to impose whatever exit charges they please on the day (“an actuarial calculation” as it was once euphemistically described at a presentation I attended many years ago). That would at least be a sensible starting point, followed by an investigation into why the performance of so many old legacy funds is so poor.

    Surely, the FCA could at least apply pressure on the providers in question to invest in quality managers or facilitate access to external funds? As ever, (properly thought through) actions speak louder than words. So often, the FCA spouts too much of the latter and too little of the former.

  2. Money Guidance CIC 16th January 2015 at 11:26 am

    It can also take up to six months to move these schemes with the imaginative blocking tactics employed by many of these providers (“We`ll have to Money Launder all the Trustees again because of our fiduciary responsibilities and the high transfer sum involved, etc. etc.).

  3. Old scheme with a 1.5% AMC paying 0.5% trail commission.

    New scheme with 0.75% AMC in top of which an adviser charges 1.00% annual fee.

    Do the maths folks.

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