The U.K. Treasury is to examine the case for capping the fees that pension funds are allowed to charge savers, in an effort to prevent exploitation of a new auto-enrollment system.
While falling prices have meant that the average charge on a fund started in 2012 was 0.51 percent, the Office of Fair Trading estimates there are more than 186,000 plans, containing 2.7 billion pounds ($4.3 billion) of assets, that are paying fees of more than 1 percent.
“People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges,” Pensions Minister Steve Webb said in an e-mailed statement today. “We are consulting on a cap on pension charges. A range of options will be on the table including an outright ban on all charges above 0.75 percent per year.”
Webb told the BBC today that the government will also look to promote consolidation among pension providers “to get scale and drive costs down.” Funds will also be banned from charging more when members stop contributing because they move jobs.
Options under consideration include a cap at 1 percent, a cap at 0.75 percent, or a flexible cap allowing funds to go above 0.75 percent to 1 percent if they can justify it to a regulator.
Legal & General Group Plc, the U.K.’s largest manager of pension assets, said the basic plan that employees receive automatically should cost no more than half a percent.
“All consumers deserve this level of value, whatever the size of firm they work for,” Adrian Boulding, pension-strategy director at Legal & General, said in a statement. “There are plenty of additional services that some people will find worth paying more for,” including wider investment choice and financial advice.
Webb suggested he’d like to see most plans charging around 0.3 percent. “Most could deliver at the sort of costs we’re talking about, but because there’s very little competitive pressure in the market, they don’t do so,” he told the BBC.
Gregg McClymont, pensions spokesman for the opposition Labour Party, said ministers had been slow to realize the scale of the problem and respond.
“To impose a charge cap, the government will first have to have full sight of all costs and charges that can accrue in a pension,” he said in a telephone interview. “No steps so far have been taken by the government on this score.”
Starting in April 2015, every U.K. employee will be signed up for a pension plan unless he or she opts out. According to the Treasury, this will mean as many as 9 million people saving for a pension for the first time or increasing their savings, and an extra 11 billion pounds ($18 billion) invested each year.
The OFT concluded in an investigation Sept. 19 that fees are too high and not always transparent. The Association of British Insurers agreed to an immediate audit of older and higher-charging funds, estimated to contain around 30 billion pounds of savings.
Labour leader Ed Miliband pointed to pension fees last year as the next scandal in British public life after journalism and banking.
Academic research published by the Review of Financial Studies in 2009 found the average British mutual fund charged 2.21 percent of its clients’ assets annually, compared with 1.04 percent in the U.S. Opaque fee structures, which exclude trading charges that can double the cost of owning a fund, make it difficult for customers to compare products and hurt competition.
A pension fund charging 2 percent a year will reduce the value of the fund by 49 percent over a 20-year period due to compound interest, according to SCM Private, a fund management firm campaigning against high fees.