Last year the Government accused Labour of “scaremongering” on excessive pension charges. Earlier this year Steve Webb explained that capping pensions such as Ed Miliband proposed would be as inappropriate as capping the price of baked beans.
Fast forward to Tuesday night. When Steve Webb rose and told the House of Commons that a cap on pension charges was the right thing to do – not least because he now said that buying a pension is NOT like buying a tin of beans – a spectacular Government U-turn was completed.
Labour welcomes the Government’s belated recognition of the peculiarities of a workplace pensions market in which the buyer is not the beneficiary and in which there exist significant information assymmetries and conflicts of interest. A cap on charges is part of the solution to the damning conclusions of the recent OFT report.
But Labour argues for a price cap as part of a wider reset of the pensions market. The Government would be wrong to think that a cap alone will ensure value for money pensions for the 10 million savers being enrolled automatically in a workplace pension for the first time.
First of all the Government has to set the cap at the right level including all appropriate charges. Already one of the UK’s biggest pension companies Legal & General has come out and said that the cap level proposed by the government is too high.
Moreover the Government has not done the homework needed to cap comprehensively. It does not have full sight of all the various charges levied by pension companies. Obtaining these will require the Government to set down the basis on which companies declare charges.
As the OFT pointed out, it is sensible for transaction costs to be outside a cap. However, this makes full transparency of transaction costs all the more important. Only this week the FCA in response to some excellent financial journalism confirmed the existence of one kind of hidden charge levied by fund managers. Worryingly, the Government consultation document on capping refers to “unavoidable hidden charges such as trading costs”. There is no good reason why these should be hidden and there are transaction costs which should be entirely avoided and others which, if exposed to daylight, could be substantially reduced in size.
Yet the Government on Tuesday night voted down Labour’s amendment to the Pensions Bill on the disclosure of all costs and charges. More widely while the Government has now accepted Labour was right on a cap, it still resists the wider reset of the pensions market we propose.
In a market like pensions, the fundamental problem is governance of the pension schemes through which we save. Without good governance, our pensions schemes will not be able to drive a hard value for money bargain on our behalf with the huge pensions companies and fund managers.
This must be the starting point for a reset of the pensions market. It means the value for money of pension schemes, including the level of transaction costs, being assessed by a board of genuinely independent trustees with a sole mandate to act on your behalf. It means action to reduce the long tail of pension schemes which are too small to achieve value for money. It means assistance to ensure consumers’ hard saved pension pot buys the most retirement income possible when it comes time to turn the savings into an annual income. It means immediately lifting the prohibitive restrictions on Nest, which has been curtailed from delivering its full potential effect for driving down prices and raising quality in the marketplace.
This is the reset the market needs. Adopting a price cap was a start but deeper market intervention is needed to deliver pensions people can trust and a real solution to the cost of living crisis to which high pension charges are contributing.
Gregg McClymont is shadow pensions minister