Employers are to be barred from using workers’ pensions to cover consultant costs as part of a crackdown on pension charges set out yesterday.
The ban of consultancy charging was one of several measures confirmed by pensions minister Steve Webb, who also laid the ground for a cap on certain pension fees.
The government acted following fears that consultancy charges were undermining landmark reforms aimed at arresting a dramatic decline in UK pension savings.
Under automatic enrolment, which began last October, millions of people are being shifted into workplace pensions, with the right to opt out. More than ten million people will be paying into a pension for the first time as a result.
However, the money they pay into those pensions can currently be used by employers to cover the costs of advice from consultants, eroding potentially significant chunks of pension savings.
Employers are being charged up to £450 per member in the first year and then £60 annually afterwards, according to research by consumer group Which?, costs that are passed on to employees through consultancy charges.
It said that in some cases an employee paying £100 a month into their workplace pension could be left with a pension pot of just £795 after their first year, once the upfront consultancy charges have been taken.
Richard Lloyd, executive director of Which?, said yesterday: “This is a big win for millions of consumers with auto- enrolment pension schemes. It is absolutely right to ban these unnecessary and unfair charges that meant people’s retirement savings were going straight into consultants’ pockets.”
Consultancy charging means workers are simply saving money for their employers at their own expense, said Robert Hair, executive director and head of financial planning at Turcan Connell Asset Management.
“There is rarely any advice provided direct to the individual members, but one way or another the value of their pension fund is being reduced by the payment of commission to the adviser by the pension provider.
“If no cost is passed on to the employer then it could be argued that workers’ pensions are being used to save the company money.”
Webb said: “With millions of people taking up pension saving for the first time under automatic enrolment, we have to give people confidence that they will get good value for money.
“That is why we are banning consultancy charges, where scheme members end up paying for advice given to their employer.”
But the Association of British Insurers (ABI) claimed the ban would leave employers without the advice they need in managing pensions.
Stephen Gay, director of life, savings and protection at the ABI, said: “We agree it is vital that savers have confidence that the pension savings system can be relied on and charges are an important part of that.
“However, the government’s decision to ban consultancy charging in automatic enrolment schemes creates a different risk to the success of pension reform in that it will reduce the availability to employers of advice and support to ensure they make the right pensions decision for their employees.”
The ban will go before the UK parliament later this year.