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Providers to cut charges on £10bn of legacy pension savings

Pension providers have agreed to cut charges on £10bn of savings trapped in expensive legacy schemes following months of pressure from consumer groups and politicians.

The unnamed providers say they will slash charges to bring them in line with the 0.75 per cent charge on auto-enrolment default funds which comes into force this April, the Department for Work and Pensions says.

Pensions minister Steve Webb has said he was willing to “name and shame” providers who were reluctant to reduce high fees following a December 2014 audit that found £26bn of savings in schemes charging over 1 per cent.

In January Money Marketing revealed the cost of delaying a cut in legacy fees by a year would potentially cost savers £340m.

Webb says: “Pension firms look after billions of pounds and millions of people’s retirement plans – so bold action on high charges is necessary.

“I have had some tough conversations with the pension providers to make sure they are taking this matter seriously and put in place changes to deliver better value for savers.

“I was reassured by the vast majority who were ready to take action and were already moving funds to lower charging environments. For many it was plain business sense, because old schemes were running on old expensive IT systems.

“Their response means that around £10bn of pension savings identified as at risk of high charges in the legacy audit will see a reduction in charges to match the charge cap.  This will give more people the confidence to save for the future.

“This action goes a long way to achieving good value for savers but I expect providers to go further in making changes in members’ interests.”

Webb adds that the Government is working with the FCA and HMRC to assess whether “inappropriate barriers” exist to stop providers’ making improvements in members’ best interests.

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Whatever happened to the 1% world? I know that stakeholder’s 1% was not supposed to cover the cost of advice, but Ron Sandler at the time 2001 to 2003 was telling as that asset allocation was where most difference/return or loss could be made for a client and charges could drag down the effective yield massively.
    As such as there is NO advice cost built in for ongoing service of legacy plans, what was the excuse of a provider charging an AMC in excess of 0.75%, let alone 1%?
    What also frightens me is when I the see firms charging 1.75% ON TOP of the platform and fund costs pushing the RIY over 3.5% with an initial fee on top!!!!!
    Whatever happened to RU64?

  2. I wonder if this will also do away with transfer penalties – there are some nasty amounts of transfer penalties out there which will cause problems for anyone wanting to take advantage of the new rules including people who have the what was minimum age of taking benefits at 60

  3. Will they include with-profits ? and its ‘notional’ 1% non explicit charge ?

  4. I agree with Edward Smith ~ lower charges is a start but, on its own, doesn’t address the issue of policyholders being (virtually) locked in to rubbish funds because the exit terms are so punitive. It will be interesting to see which other providers stand fast and who are therefore named and shamed (should it actually come to that).

  5. The high annual charges and high exit fees are especially because of the colossal commissions paid up front for the sale of the plans and subsequent increments, etc (initial units and accumulation units). It was the way the old industry worked sadly. Some companies were ‘worse’ at it than others – especially the direct sellers like Allied Dunbar (initial and accumulation units). So are they really penalties or just costs that policyholders would have had to pay someway and if they stay now, they still pay every year so moving or not should not be considered on the basis of simple annual charges? Either way, those with them will be taking a big hit to close the door to the past.

  6. The high legacy charges were necessary as Philip has said to cover the high initial commission payments, and the effects of continual churning that went on. Ned Cazalet once identified the amount of business being written as almost equivalent to the net amount of business gained and lost by providers, meaning that most of it was not profitable.

    Whilst I do not necessarily feel sorry for the providers, they have already taken a hit on this business so why should they compound their losses still further? The past is the past, we cannot change it, just learn from it.

  7. Webb says: “Pension firms look after billions of pounds and millions of people’s retirement plans – so bold action on high charges is necessary.
    Hello Mr Webb, You also look after about 12.5 million pensioners state pensioners but discriminate against just 4% or 550,000 purely dependent on which country that they retire to so where are you on the list ?
    Therefore I name and shame Steve Webb and the Department of Works and Pensions !
    Can I have a seconder please ?

  8. @George Morley – Seconded on that issue yes.
    @Geoff Sharpe – I agree with you on high legacy charges “Whilst I do not necessarily feel sorry for the providers, they have already taken a hit on this business so why should they compound their losses still further” – what should NOT happen however is the fund choice and charges for that fund choice if they remain with the provider to avoid the high transfer OUT charges associated with those legacy plans should reflect the fund choice i.e. be TCF. The provider should clearly quote a platform charge and a fund charge and the client should be paying for what they receive, i.e. if it is a closet tracker (as many of them are) the fund charge should be at a tracker’s level. If they want to offer a wider range of funds/active management, by all means charge for a active fund selection. People should not have to choose between staying with a closet tracker with fees at active level or take a hit on the transfer out charge.

  9. Andy Robertson-Fox 2nd April 2015 at 10:18 am

    George Morley I see that Phil Castle has already seconded your proposal to name and shame Steve Webb and although I am not now affected by the frozen policy I fully support as a matter of principle the campaign for world wide pension parity. The frozen pensioner met all the same NI contribution conditions during their working lives and there is no justification for denying some of those who live abroad the same rights in withdrawing from the Fund as others who also live abroad…but in a different country……and the irony is that he talks about costing savers £340 million by delaying a cut in legacy fees and yet in maintaining the frozen pension policy he is denying the UK economy and taxpayer a saving of potentially £billions…see the ICBP “Cost and Savings Analysis on Unfreezing Pensions”

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