Two of the UK’s largest insurers today hit back against plans to impose a cap on fees for workplace pension schemes, arguing that costs should be even lower to help save workers “tens of thousands of pounds”.
Mutual Royal London said proposals by pensions minister Steve Webb to set a minimum charge could actually drive up costs for savers, while Legal & General called on the UK government to take bolder action and implement an even lower cap.
Although the Office of Fair Trading stopped short of calling for a limit on workplace pension charges following its recent review into the £275 billion market, Webb is consulting on proposals to set a maximum fee of either 0.75 or 1 per cent.
However, L&G, which today reported better-than-expected sales of £1.8bn for the first nine months of the year, said it has already capped charges at 0.5 per cent for its auto-enrolment schemes, designed for companies that are obliged to offer pensions for their employees.
Chief executive Nigel Wilson said: “We believe nobody saving for a workplace pension in standard default funds should have to pay more than this.
“The government’s proposed 0.75 per cent cap needs to be strengthened in our opinion – reducing it to 0.5 per cent could benefit pension savers by tens of thousands of pounds over a working lifetime.”
Royal London, which is planning to ditch its Scottish Life and Scottish Provident brands, today hailed “buoyant” demand for group pensions as it reported a 14 per cent rise in new business sales to £3bn for the first nine months of the year.
Chief executive Phil Loney told The Scotsman that the average cost of a workplace pension scheme is 0.52 per cent, but some providers may see the introduction of a cap as an opportunity to hike their fees.
He said a study carried out with accounting giant Deloitte had found there was the potential for charges to drop by 40 per cent over the next 20 years, thanks to the expansion of the industry caused by auto-enrolment, which already applies to the largest employers. According to Tom McPhail, head of pensions research at Hargreaves Lansdown, a further 30,000 firms will be affected by the rules before the summer.
Loney added: “If we go ahead with price capping in this market, investors in the big shareholder-owned incumbents will be raising a glass.
“We would like the minister to give an obligation to employers to periodically review their scheme and switch it if they can get better value for their members. At the moment there is no legal obligation on employers to act in the best interests of the scheme members and that’s the real missing piece of the jigsaw.”
However, Edinburgh-based rival Aegon UK has argued that setting the cap too low could reduce choice, with smaller employers forced to use the government-sponsored National Employment Savings Trust – which has an upfront fee of 1.8 per cent on contributions and an annual management charge of 0.3 per cent – because “private pension providers can’t take on new schemes at a loss”.
Steven Cameron, Aegon UK’s regulatory strategy director, said: “Driving down charges may win votes and secure popular press headlines, but pensions policy needs to look beyond the next general election and do what’s right for future generations.”