Lord John McFall’s pension commission has called on the Government to cap scheme charges at 1.5 per cent as part of wide-ranging proposals aimed at reinvigorating the occupational savings market.
In its final report, the Workplace Retirement Income Commission, led by former Treasury select committee chairman McFall, says pension charges need to be capped to ensure people get value for money out of automatic enrolment.
The commission says the cap should match the existing limits for stakeholder pensions, which are 1.5 per cent a year for the first 10 years and 1 per cent a year thereafter.
McFall says: “There is no point in bringing people into pensions that will erode their savings through high fees. The Government should set a clear ceiling on the charges that will be allowed under auto-enrolment.”
This follows a warning last month from pensions minister Steve Webb that the Government could cap charges if it thinks people are not getting value for money. He said: “If we think schemes are charging people too much, say, 1.5 per cent or more and people are not getting value for money, we have the power to set a cap.
“There is an open question about the extent to which the market will fix this problem for us but we are not just looking at the averages, we are looking at extremes. Charges are an important issue, so it is something we will be keeping a close eye on.”
McFall also urges policymakers to investigate how the auto-enrolment contribution floor can be increased from 8 per cent after 2017. The former Labour MP says annuities are “sorely in need of a shake-up” and calls on the industry to develop more flexible products.
He says serious consideration should be given to a requirement for schemes and providers to direct members and consumers to an annuity comparison website as part of proposals to increase shopping around at retirement.
In addition, McFall calls for a permanent, independent pension commission to be established.
Hargreaves Lansdown head of pensions research Tom McPhail says: “This report seems to be more preoccupied with generating sensationalist headlines than with making a constructive contribution towards improving the pension system. It is a disappointment and an opportunity missed.”
Wingate Financial Planning director Alistair Cunningham says: “Putting a cap on pension scheme charges is very draconian. It should be for the individual to choose what charges they are willing to pay. I do not see why there needs to be legislation.”