The pensions industry will face an “unprecedented” misselling scandal unless high charges on old schemes are abolished, the Pensions Institute warns.
Providers have come under pressure from pension experts and politicians over the impact high charges will have on peoples’ retirement savings ahead of automatic enrolment.
The Association of British Insurers has argued that new auto-enrolment schemes have an average annual charge of 0.52 per cent. However, the Pensions Institute says some default funds set up in the 1990s charge up to 3 per cent a year.
A report published by the institute today argues that because small employers are likely to struggle to access financial advice, they could stick with their old, high-charge scheme for auto-enrolment rather than switching to a low-charge scheme such as Nest.
It says: “Unless older high-charging schemes are abolished, their use for auto-enrolment – when up to 10 million low to median-earners often with low financial literacy join [defined-contribution] schemes – will lead to the UK pensions market facing a misselling scandal on an unprecedented scale.”
Pensions Institute director and report co-author Professor David Blake says: “Fortunately there is time to address the problem of old high-charging funds, which for historic reasons are still widely used in the smaller employer market. These employers are not required to introduce auto-enrolment immediately but many companies will need to be prepared by mid to late-2013.
“This report recommends the introduction of a kite-mark code that can help these employers find value for money schemes – and this is especially important if the employer is considered uneconomic for the advisory and provider market.
“A clearly signposted kite mark website for good quality value-for-money schemes – available to all employers, irrespective of their size and employee profile – would facilitate fair and equal treatment for all private sector employees, irrespective of how much they earn and the company for which they work.”
Labour leader Ed Miliband recently called for a 1 per cent cap on pension charges.
Labour Shadow pensions minister Gregg McClymont (pictured) says: “Yet another independent report underlines what the Labour party has been saying about costs and charges. While the voluntary recommendations in the report are welcome, it is time the government stepped up to the plate and ensured that fair value and good governance are delivered to all pension savers.”
Association of British Insurers director of life, savings and pensions Stephen Gay says: “It is important that all workers taking advantage of automatic enrolment are enrolled into schemes that offer value for money. In a competitive market we expect that efforts to deliver improving value for customers will remain a key measure of success.
“Pension providers and trustees also have a duty to ensure that the default option offered to workers is competitively priced, and the Department of Work and Pensions has the ability to cap charges if they are too high.
“The ABI continues to work with both the FSA and The Pensions Regulator to ensure that charges and costs are disclosed consistently to employees across all pension schemes in order to achieve greater transparency for workers who are automatically enrolled.”