Why hasn't the government capped pension charges yet?
In the Pensions Act 2011 that enshrined the legislation around auto-enrolment and the formation of the National Employment Pensions Trust, the government was handed power to cap pension charges.Even if you are an actuary or have a degree in mathematics, pensions charges are almost unfathomable. The fact that pension providers don't make the full cost of pensions known means savers have no chance of working out what percentage of their pension fund will be eaten up by costs.
The annual management charge (AMC) was the typical charge that was quoted by pension providers, however that was usurped by the total expense ratio (TER) which is a more accurate reflection of investment charges. This still isn't good enough as it doesn't take into account the costs of dealing stocks incurred by the fund and paid for by the consumer.
In short, there are too many costs that the pension industry doesn't declare making it impossible to compare pensions to see that you get a good deal, and allows the pension industry to charge what it likes, although it must be said that charges have reduced over the years.
- Top 10 retirement tips - special 16-page guide
- What are the 10 pension mistakes millions of Britons make?
Pensions minister Steve Webb has said the government won't stand for astronomical charges on pensions any longer but has made no firm commitment as to when it will tackle the problem of costs.
The pensions industry has made steps to self-regulate the cost of pensions; the National Association of Pension Funds, is currently drawing up proposals for charges.
But is it a good idea to allow any industry to self-regulate? The pensions industry has effectively been self-regulating costs and the disclosure of them for years and looks where that has left us.
Webb has pushed through a lot of radical, game-changing legislation in the short time the coalition has been in power, and he needs to make sure that legislation is used to protect savers.
Putting a cap on charges is not going to be popular with the pension providers, we only need to look back at stakeholder pensions which had their charges capped at 1%, to see that.
However, the pensions industry has shown it can't be trusted to ensure consumers know what they are paying. No-one expects to get something for nothing but it's only fair that we know what we're paying.