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Labour prepares to turn up the heat on pension charges

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Labour is preparing to ramp up the pressure on the Government over pension costs and charges as it turns its attention to the development of large scale super-trusts.

The costs associated with pension saving have come under increased scrutiny this year, with the National Association of Pension Funds persistently urging the Government to encourage the industry to build more large-scale pension schemes.

The NAPF argues that bigger schemes benefit from lower costs and better levels of governance.

Speaking to Money Marketing, Labour Shadow pensions minister Gregg McClymont says: “With the existing focus on full disclosure and improving comparability of costs and charges, it is likely that larger schemes will have an advantage.

“You will be hearing more from us on the issue of scale. If you look around the world, there are examples in the US and Australia of large schemes that are able to deliver exceptionally low charges to savers.

“We want the Government to look at the current regulatory system to see where there are barriers to the establishment of super trusts.”

The issue of scale is, of course, closely tied to two policy issues McClymont has targeted aggressively in 2012 – small pots reform and costs and charges.

Last week, Money Marketing revealed Government plans to introduce a new system where people’s pension pots move with them automatically when they change jobs are under threat because the industry is unwilling to pay up to £40m to build the infrastructure needed to implement the reforms.

McClymont has been in favour of the alternative “aggregator model”, where pensions are automatically transferred into a central scheme, such as Nest.

“If you cannot get small pots aggregated – and “operation big fat pot” has been one of Steve Webb’s flagship policies – it does not inspire confidence given that we are days away from auto-enrolment kicking off,” he says.

“One would have thought the Government would have squared off how the new system would be paid for before it went down this road. It is very concerning.”

On costs and charges, McClymont has been turning the screw on the industry to tell employers and consumers exactly how much they pay for their pension.

He says: “I think there is now agreement that employers should be provided all relevant information on costs and charges in a clear, simple format, so the next step is to look at how that can be extended to the saver as well.

“I am currently looking at this and listening to feedback from the industry. Nobody is suggesting it can be done overnight but if there is a will from the industry then I am keen to work with them to make this a reality.”

McClymont suggests he could support Hermes Focus Asset Management chairman David Pitt-Watson’s proposal to introduce a simple annual statement of pension costs and charges, similar to a bank statement. This form of disclosure already exists in Denmark.

“I think that is a very good route to go down and I agree with most of what David Pitt-Watson says in this space,” he says.

“It is not defensible to be in a position where the employer and the saver do not know what the total costs and charges are and if you can make that as straightforward as a bank statement, then that would be a good thing for consumers.”

The Labour minister also remains on the warpath over Nest. He wants the Government to prioritise removing the scheme’s £4,400 contribution cap and ban on transfers.

He says: “How do you justify the restriction on transfers? What is the justification for that? I think the DWP, the Government and the pensions minister are in the wrong place on this.

’The Government and the pensions minister are in the wrong place on this’

“They should be devoting time and resources into having the restrictions lifted as soon as possible.”

With automatic enrolment now just 11 days away, McClymont will be telling the Labour party conference that making sure the reforms are successful should be the DWP’s number-one priority.

With that in mind, the MP for Cumbernauld, Kilsyth and Kirkintilloch East will continue to press for a reduction in the auto-enrolment earnings threshold from £8,105 to £5,035 – despite pensions minister Steve Webb attacking the proposal in July.

In an interview with Money Marketing, Webb said: “Imagine if the threshold was £5,500 and someone earned £5,600. They would be levied on the £100 above the threshold, phased in at 1 per cent – that is £1 a year or 2p a week.

“Can you imagine the derision we would get if we were forcing firms to put 2p a week into their employees’ pensions? It is ridiculous.”

McClymont says: “The raising of the auto-enrolment threshold remains an issue for us. If you look at the amount of pension pot people on incomes below the current threshold could save over 40 years, you are actually talking about a five-figure sum which is a fairly hefty amount to take into retirement.

“I get the feeling Steve Webb is protesting a bit too much on this. If auto-enrolment is about ensuring everyone ends up with a decent pension in retirement, raising the threshold seems like an odd way to do that. I am sceptical of increasing the threshold every year.”

Is McClymont suggesting the threshold should be frozen permanently at £5,035?

“There has to be scrutiny of this – we need to ask why this is being done. The minister’s response to lowering the threshold seems to be, “that is a ridiculous idea”.

“There needs to be a more reasonable discussion about what the costs to those who will be excluded from auto-enrolment are over their lifetime. It needs that kind of debate rather than Steve Webb just dismissing it out of hand.”

The bedrock upon which the pensions minister wants to build auto-enrolment is the state pension. His proposed flat-rate £140 a week payment for future retirees would replace the existing means tested system.

While McClymont agrees with the idea in principle, the DWP white paper detailing how it will be done has been delayed until autumn. It remains unclear, for example, how the Government plans to treat people who are contracted-out of the state second pension.

McClymont says: “We support the reforms in principle but we need to see the detail. The previous Labour Government was moving down this route but just much more steadily.

“The issue is the cliff edge because contracted out workers and those in the state second pension have saved in the expectation they would be getting significantly more than those that made the basic contributions.

“Until we see exactly how those issues are going to be managed, it is hard to make a judgment on it.”

Labour’s 10 principles for pension costs and charges disclosure:

There must be a code of conduct for the declaration of costs and charges for pension savers as well as employers. The same principles must apply to codes for both.
Costs and charges should be declared in a simple and clear summary with the detailed backing information available on request.
The form of declaration should be standardised so that the costs and charges of pension schemes can be compared easily.
The costs and charges declared should include all the costs and charges which affect the value of the savers’ pension pots. This includes all costs to the invested funds – both explicit and implicit costs arising from trading. This necessarily implies that the costs and charges from all intermediaries and the provider are included.
Declaration of costs and charges should include an illustration of the impact of total costs and charges on the final pension pot.
Where different costs and charges apply to different members, eg active or deferred members, corresponding illustrations should be included.
The costs and charges which will apply as a consequence of switching pension provider should be declared.
Employers and savers should be regularly updated on costs and charges since some vary over time. Variations in updates should be highlighted.
A code should apply to the industry as a whole and the code should be binding in its entirety.
An auditor independent of the provider should sign off on a statement that the declaration of costs and charges is a true and fair statement of the total costs and charges.

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