Billions of pounds of pension savings are locked in old schemes with annual management charges of over 1 per cent and are subject to exit charges if members leave schemes early.
An audit of legacy pensions, published today by the Independent Project Board, revealed the scale of assets locked-up in schemes with charges well above the 0.75 per cent auto-enrolment charge cap.
However, the board concludes value for money “is not solely determined by charges” and there is “no simple one size fits all” way to ensure savers get the best value possible.
It has shied away from recommending “industry-level actions” in favour of asking providers to review whether they justify high charges by 30 June 2015. The new independent governance committees should report back to pension providers on how best to secure members’ value for money by the end of December 2015.
The board also recommends the Department for Work and Pensions and the FCA jointly review the industry’s progress in addressing poor value schemes by the end of 2016.
The audit reviewed £67.5bn of assets under management from pre-2001 defined contribution schemes administered by Association of British Insurers members.
It found £42bn had charges less than 1 per cent with up to £26bn exposed to charges above 1 per cent. Of this, between £5.6bn and £8bn is potentially being charged above 2 per cent, while nearly £1bn is exposed to charges over 3 per cent.
Most savers being charged over 3 per cent had small pots of less than £10,000 and had stopped contributing. The board warns: “For such savers the impact of monthly fees can result in a very high impact of charges”.
In addition, about £3.4bn of assets have potential exit charges of 10 per cent if members leave the schemes before their agreed retirement date.
Independent Project Board chair Carol Sergeant says: “The challenge now is for providers and governance bodies to work together under the watchful eyes of the regulators to review our analysis and recommendations in the context of the schemes and savers they are responsible for, and bring about the necessary changes so that all savers who are not in automatic enrolment schemes can benefit from modern standards and outcomes.”
The ABI set up the board following the Office of Fair Trading’s 2013 report on defined contribution workplace schemes, which found about £30bn in old, high-charging structures potentially failing to give savers value for money.
The board included members from the FCA, NAPF, TPAS, DWP and the ABI.
ABI director of policy and deputy director general Huw Evans says: “The Independent Project Board is right to recognise that no single charging structure provides the best value for all customers in all circumstances. How much people save and for how long can have an important impact on charge levels, and investment performance and quality of scheme governance also matter.
“Providers will welcome the clarity this report provides and will remain absolutely committed to building on the radical changes of the last decade which have already seen average pension charges fall to their lowest-ever levels for auto-enrolment schemes. This report will help providers do more to identify and tackle those workers who could be impacted by higher charges and ensure the right outcomes for them”.