LONDON (Reuters) - Annual charges on British workplace pension schemes that automatically enrol their members will be capped at 0.75 percent from April 2015 in what the UK pensions minister called “an end to rip-off pension charges”.
The charge cap, announced by Pensions Minister Steve Webb in the House of Commons on Thursday, is a further blow to the UK insurance industry following reforms scrapping compulsory annuity purchases announced by UK finance minister George Osborne last week.
Webb said the cap would transfer 200 million pounds ($331 million) “from the profits of the pensions industry to the pockets of savers” over the next 10 years.
The cap is the toughest of three options the government had considered, the others being a 1 percent cap or a looser “comply or explain” rule which would have allowed schemes to charge higher fees if they could justify them.
“This government will be the first to get an iron grip on the issue of pension charges,” Webb told parliament. “We are going to put charges in a vice and we will tighten the pressure year after year.”
Webb said that further changes would be made after the cap was implemented, with schemes being prohibited from taking sales commissions from pension schemes after April 2016.
The charge cap will apply to all defined contribution (DC) pension schemes used for auto-enrolment but will not yet apply to the older “legacy schemes”, though a spokeswoman for the Department of Work and Pensions said reforms were also being considered for those schemes.
The announcement came on the same day that some of the new reforms to the pensions system came into force, giving retirees more freedom to choose what to do with their pension pots.
Steve Webb’s announcement was met with criticism from the fund management industry, which said the government should focus its efforts on improving governance and standards for pensions.
“A charge cap is not the best way to achieve good outcomes and this was a key finding of the 2013 Office of Fair Trading (OFT) market study,” said Jonathan Lipkin, director of public policy at the Investment Management Association, a trade body.
The Association of British Insurers (ABI) said it agreed with the OFT study and said the charge cap was unnecessary as pension charges were at their “lowest ever levels”.
“The implementation of auto-enrolment, combined with the radical reforms in last week’s budget, have created a challenging environment for employers and pension providers,” said Otto Thoresen, the ABI’s director general, in a statement.
But insurer Legal & General said the cap could have been set even lower and that one of the reasons people were not retiring with large enough pension pots was high charges.
“We would have liked the government to have capped auto-enrolment default schemes at 50 basis points, but we welcome the direction of travel,” said Adrian Boulding, L&G’s pensions strategy director.
The opposition Labour party backed the charge cap but criticised the government for delaying it - it had been expected to come into force this April but was put back by a year after lobbying by the insurance industry.
“Savers hit by the cost-of-living crisis have lost out because the government has repeatedly delayed plans to introduce a cap on rip-off pension fees and charges,” Shadow Pensions Minister Gregg McClymont said in a statement.
Reporting By Jemima Kelly, William James and Kylie MacLellan; Editing by Chris Vellacott and Greg Mahlich