'Strong case' for pension fee cap

Steve WebbPensions minister Steve Webb has told MPs there is a "strong case" for imposing a cap on pension charges as up to 10 million new retirement savers are created under the Government's landmark reforms.

The Government is to produce a consultation looking into pension charges, following fears that people could be placed into "rip-off" high-charging schemes which eat away at their savings pot.
Mr Webb told the Work and Pensions Committee there has been some "unacceptable practice" in the past as he answered questions about the progress of automatic enrolment into pension schemes, which started last autumn with larger firms.

An Office of Fair Trading (OFT) report warned last month that up to £40 billion of pension savings could already be sitting in schemes which are delivering poor value or are at risk of doing so.
The OFT found that ''most employees do not engage with, or understand, their pensions'', but it stopped short of recommending a cap on charges, raising concerns about how costs would be defined and also that providers may use a cap as a target.

But Mr Webb told the committee: "I think these things are all deal-able with."

He said: "Our consultation will be looking at options for charge caps and we'll move fairly fast on that."

Mr Webb has previously suggested that a charge cap of 1% a year could be placed on people's pension savings.

When reminded of this in the committee, he insisted the Government will be carrying out a "genuine consultation" setting out a "range of options".

He said: "The OFT is absolutely right, just plucking a number from the air because it happens to be a round number isn't good policy-making.

"I think there is a strong case for a charge cap. As you'll see when we produce the consultation document, hopefully we've got some innovative ideas about how that might be done."

The Pensions Regulator and the Association of British Insurers (ABI) are already working to make improvements in the industry.

Mr Webb told the committee that some pension schemes were set up around the 1990s, when the higher rates of return of the time masked charges that now appear "clearly excessive" in hindsight.

Mr Webb said: "I find variable performance within the industry. There are not quite good guys and bad guys out there but essentially there are people who at every turn try and get their little margin and there are others who are more member-focused.

"I think there is a range but there certainly has been unacceptable practice."

Giving further detail of what any cap would look like, Mr Webb said: "Our particular focus is what we call the double defaulters - the people who never chose to save in a pension but were put in one and then who never chose where their money was invested, so it went in the default fund.

"And it seems to me if you're interested in consumer protection, your focus should be on the people who never made a choice.

"So, if we were to impose a charge cap, our assumption is it would be on the default funds of auto-enrolment schemes. So we wouldn't say: 'You can't pay more than such and such'.

"If people want to pay more than such and such and they think they're getting something for it, it's a free country."

Mr Webb later added: "Frankly, we're talking about 10 million people and it's not like we're talking about something marginal.

"Auto-enrolment and default funds will be the best part of 10 million people and that it seems is our primary consumer protection duty."

Mr Webb said the Government also plans to address a much-criticised practice whereby pension savers who have stopped actively paying into a pension, perhaps because they have changed jobs, are often charged higher fees.

More than 1.7 million people have been placed into workplace pensions since auto-enrolment started in autumn last year with the biggest firms and early figures have shown that a higher-than-expected nine out of 10 people are staying put in the schemes rather than opting out.

Mr Webb brought auto-enrolment promotional material to the committee meeting as an example of the Government's publicity efforts.

He also reiterated the Government's ambitions to help people make the most of their pension savings by building up one "big fat" pension rather than have lots of long-forgotten smaller pots scattered around.

Mr Webb told the committee that over the course of the year, one pension provider alone has accumulated 10,000 "stranded" pension pots worth £14 on average.

Referring to the Government's goal of helping people to consolidate their pension pots, Mr Webb said: "If we don't get on with this, how many millions of silly little pension pots scattered all over the economy are there going to be?"

The minister also dismissed predictions that the smallest firms will fail to comply with their auto-enrolment responsibilities as the scheme rolls out as "complete tosh".

He said: "So far all the merchants of doom have been proven wrong."
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