ABI demands action on clearer pension charges and costs ahead of auto-enrolment

In a letter (2-page / 537KB PDF) to the Pensions Regulator and the Financial Conduct Unit at the Financial Services Authority (FSA), the industry body has set out "clear priorities" on actions needed by the regulators and the pensions industry if they are to establish an "industry protocol" on charging by the end of the year. The Pensions Regulator regulates all work-based pension schemes but shares responsibility for so-called 'contract based' schemes, such as those provided by insurers, with the FSA.

The letter follows pensions minister Steve Webb's warning last month that the Government could take legislative action if the industry did not introduce measures to cap "sky high" charges that are "tearing the heart out of people's pensions". Writing in the Daily Telegraph, Webb said that Government powers to cap charges, strengthened by the Coalition last year, could be used if it became apparent that consumers "needed that protection".

ABI director general Otto Thoresen said that although some charges for contract-based pension schemes had "reduced dramatically" in recent years, the industry and regulators had to work together to ensure that clear and meaningful information which would help employees "make the right decisions about their pension" was available across all types of pension schemes. Action was needed, he said, before the automatic enrolment of employees into workplace pension schemes began for the largest employers in October this year.

"Auto-enrolment will have a critical impact on the future retirement prospects of today's workers," he said. "If we are to minimise opt-outs it will be vital that employees understand what they are paying and have confidence in the pensions they are being auto-enrolled into. For too long, different parts of the private pensions system, regulated by two different regulators, have given employees too little information about what they are paying. Openness and transparency are now expected by customers."

In the letter, Thoresen called for the "consistent and simple disclosure of charges" to all employees, whether members of contract- or trust-based pension schemes. Transaction costs, such as broking fees, should be made available to employees while scheme members should receive "regular, clear and meaningful information" on charges and transaction costs as their funds build up.

The ABI said that workplace contract-based defined contribution schemes of the type offered by its members currently disclose annual charges for the scheme to both employers and employees, but do not disclose any transaction costs that result from the trading necessary to invest in the scheme – for example, stamp duty paid when a fund manager uses a pension pot to buy or sell shares. Trust-based workplace defined contribution schemes, however, do not disclose either the charges or transaction costs, it said.

Where disclosure does currently take place however, the ABI said, it is done in an "inconsistent" way. Developing a consistent regime is important, it added, to ensure that customers could make "genuine comparisons between the charges and costs they are being presented with".

Bill Galvin, chief executive of the Pensions Regulator, said that he was "pleased" with the ABI's plans.

"Last summer the Pensions Regulator called upon the pensions industry to improve the transparency and comparability of pension charges," he said. "We are very pleased the ABI has proposed this action plan and we welcome the opportunity to engage with them, as we have other industry groups such as the [National Association of Pension Funds]. Action by the industry now, ahead of the main wave of auto-enrolment, is both timely and appropriate."