Government "will not hesitate to take action" on high pension charges, minister says

Writing in the Daily Telegraph, Steve 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".

"Capping charges is not straightforward," he said in the article. "There is a risk that the cap becomes the norm and lower charges are levelled upwards. It is also not easy to decide which costs should be included in the definition of the cap. But we have the power to cap charges ... and we will use them if consumers need that protection."

His comments come the week after a report (30-page / 691KB PDF) by the Royal Society for Arts (RSA) revealed a lack of transparency on charges by pension providers, with 21 out of 23 providers surveyed denying that there were any additional costs to members than an annual management charge (AMC) and administration fees.

Webb said that charges were more of an issue in older pension schemes, which often 'locked in' consumers to high cost contracts with substantial exit penalties to discourage them from moving their money elsewhere.

"I would like to see the leading companies look again at their 'back book' of old pension policies," he said. "They should ask themselves how many policy holders they have who have pensions on terms that they would not dream of offering to new customers."

Charges in general were, Webb said, "coming down dramatically" ahead of the introduction of auto-enrolment, which will begin for the largest employers in October this year. By 2018 all employers will have to automatically enrol eligible jobholders into a suitable work-based pension scheme or the Government-backed National Employment Savings Trust (NEST). Webb said that the schemes chosen by those companies that had already made provision for automatically enrolment "overwhelmingly" offered a "very low by historic standards" AMC in the region of 0.5%, while NEST will provide pensions at "an equivalent cost".

Pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said that scrapping exit fees could be a "neat solution" for savers trapped in poor-value pension contracts by high annual charges and stringent exit penalties. However, she said that mistrust of the pensions industry by savers was a bigger problem to overcome.

"High charges are only part of the picture," she said. "Historically, the industry has not made its products easy to understand and there have been a number of high-profile problems, such as pensions mis-selling, in the past. The industry must take steps urgently to built this trust - otherwise the Government's flagship auto-enrolment initiative will fail in its objective of getting more people into pension saving."

Ros Altmann of lobbyists Saga said that exit fees for some pension contracts were as high as 20%, while some savers in older contracts had experienced annual charges worth 4% of the scheme's value. The Financial Services Authority (FSA), which regulates so-called 'contract based ' pensions in conjunction with the Pensions Regulator, should have picked up on the issue earlier, she said.

"It will be legally difficult to force pension providers to do something but the industry should behave honourably if it ever wants people to trust it again," she told the Daily Telegraph.

Last week Otto Thoresen, director general of the Association of British Insurers (ABI) said that the average AMC of its members for newly-established automatic enrolment schemes was 0.52% while the average for existing schemes was 0.77% and "could be lower" than 0.3% in some cases.

"The pensions industry is absolutely committed to ensuring that charges are as low as possible and that customers understand what they are paying," he said. "Scaremongering about charges runs the risk of putting off many people from saving into a pension, which is critical for their financial future."