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 schemes set up in the 1990s charge up to 3 per cent a year.
A report published by the institute last week 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 calls for a 0.5 per cent price cap for group pension schemes.
The PI 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.”
The report also recommends the introduction of a kite-mark code to help employers find value for money schemes and calls for advice to employers to be regulated by the Financial Conduct Authority.
Labour leader Ed Miliband recently called for a 1 per cent cap on pension charges.
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.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “We believe a charge cap would stifle innovation, undermine member service and communication and ultimately it lead to poorer member outcomes.”