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Warning over ‘unprecedented’ auto-enrol misselling into old schemes

Gregg McClymont 480

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.”

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Jon Dean - Altus Ltd 11th October 2012 at 9:25 am

    The FSA have left quite a lot of rope for advisers to later hang themselves on. Only where the client has decided to switch advisers will “the new adviser … have to provide the client with an ongoing service in return for the trail commission”. Most advisers are therefore not obliged to do anything to reduce charges, and as Tom says could be exposing themselves later to allegations of (passive) mis-selling.

    Advisers should be proactively looking for better deals for their small employer clients now, in their own and clients’ interests.

  2. this is a non story, unless of course they can evidence which pension schemes still charge 3%pa. Haven’t seen these for a decade or more

  3. How many more ill-informed commentators does this debate need. Like career politicians, this career academic has no experience of the real world.

    Charges today are not excessive as most advisers posting here will testify. When will the McClymonts, Blakes, Milibands and Pitt-Watsons get out of their cosy cocoons and go see some real schemes rather than the fantasy ones in their heads?

    As for kite marks – just shows how off the mark this bloke is – the NAPF one has been running for three years and I doubt if one thousandth of a percent of the population has heard of it.

    He should focus his attention on the likes of Nest and NOW, particularly the latter where the charge structure can have a severe impact on low earning short stayers.

  4. Oooh, I say! In the street parlance so beloved of our switched on Parliamentarians, it seems we are all ‘Dissing’ this woebegone plan. How very naughty. We should all know better!
    Just like today’s awfully erudite report from Academics (please note Academics!) at the Pensions Institute – Part of the Cass Business (Prevention) School – that ‘toxic’ pensions will halve pay-outs. They are worried that high fees could lead to people opting out.
    Dear bunnies; when you manage to climb down from your castles in the air, you need to realise that the average person never reads the literature and doesn’t have the first clue of how his pension is invested, with whom or what the charges are. Opting out will purely be as a result of people not wishing to have their incomes sequestered against an uncertain promise half a lifetime away.
    According to the PI a typical existing workplace scheme charges 3% with compared to about 0.5% at NEST. (They have obviously never heard of Group Stakeholder).Oh yes – presumably they are ignoring the charges in the first 10 years and assuming that NEST will honour the intention to reduce charges thereafter. Now I’m no MBA (Master of Bugger All), but it occurs to me that NEST will be used by many as a shell scheme to facilitate Opting Out – how will that impact on their profitability and obligations to reduce charges? Remember that TATA was the only ball game in town when it came to tendering – so they are in essence a monopoly. Dear Cass academics – Please go back to your Samuelson and read up on Monopolies!

  5. Hey Ho!

    When will the Great and the Good grasp the following:

    Nothing — absolutely nothing — happens in a company until somebody SELLS SOMETHING.

    Until then, these self-annointed sages will not have anything useful to contribute.

    Love and kisses

    Larrykins xxxx

  6. Oh and by the way, how come the geniuses have completely ignored the impost on pensions put in place by Crash Gordon – or doesn’t that count?
    When you analyse it this alone must be worth more than a few lousy basis points of charges.
    Either this is further evidence of researchers ignorance or monumental hypocrisy.

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