THE events set in motion over the last two weeks of March 2014 will reverberate for years to come.
Very few people who save into a pension will be unaffected by the reforms and proposals outlined in recent days. The difficulty at this point, however, is working out whether those changes will help you or hinder.
The chancellor set the ball rolling by using the Budget to launch the so-called “pensions revolution”. His sights were set firmly on the short-term political gains to be made from opening up access to pension savings, with no concern for the disastrous consequences that will unfold over the long-term.
Last week the pensions minister got in on the act. This week it’ll be the turn of the City regulator.
By the standards set by Chancellor George Osborne, the reforms unveiled by Steve Webb on Thursday were modest.
His proposed cap on pension charges would mean that anyone automatically enrolled by their employer into a defined contribution pension scheme from April 2015 will not pay management charges above 0.75 per cent.
It’s an easy win. Charges are an easy target and there’s growing awareness of the impact that high costs have on pension pots.
Yet all is not as it seems and there are drawbacks to the proposals. One is that schemes currently charging below 0.75 per cent may be encouraged to raise them. The average charge on schemes launched over the past decade is just 0.51 per cent, according to the Office of Fair Trading (OFT).
Conversely, where charges are lowered to meet the cap some providers will scale back their service and investment choice, potentially to the detriment of investment performance.
There’s also the absence of measures addressing the lack of transparency that makes it so difficult for pension savers to know exactly how much they’re forking out in costs. Not only will the cap initially exclude charges such as transaction fees, but some providers will doubtless respond by sneaking in other charges under the radar.
Nor has Webb tackled the real charges scandal, which is of the millions of people stuck in expensive legacy schemes with costs far higher than those launched more recently and exit fees that prevent them from moving to a better deal.
The OFT estimates that some £2.65 billion in workplace pension savings is held in schemes with annual charges above 1 per cent, but they won’t initially be covered by the new cap.
Some of that slack will be taken up by the Financial Conduct Authority (FCA), which this week will mark its one-year anniversary by announcing an inquiry into old endowment, pension, investment and life policies. Its focus will be on those sold between the 1970s and 2000, including policies held by closed-book “zombie funds”.
This long overdue probe will include a review of the exit fees trapping millions of savers in expensive pensions that are no longer fit for purpose.
If the FCA acts decisively on exit fees it will do more for the fair treatment of long-suffering savers than the unlamented Financial Services Authority managed in its entire 12 years of existence.