There is an urgent need for improved minimum standards for all workplace pensions, and charges should be capped, writes Richard Lloyd
Do you know if you’ll have enough money for your retirement? The latest Which? Consumer Insight Tracker found that only half of all people in Scotland yet to retire are currently contributing to a pension; that includes 70 per cent of people in full-time employment in Scotland.
Only one in five people in Scotland who are not yet retired feel confident that they will have enough money to live comfortably when they do finish working. Only three in ten of retired Scottish people say they are living comfortably in retirement.
People are likely to have to work longer before retirement than previous generations. With consumers being squeezed by the rising cost of living, it is vital the pensions market is working in their favour.
It’s now over a year since “auto-enrolment” into workplace pensions was introduced, starting with the largest firms. This was a welcome change to encourage more people to save regularly, putting the onus on individuals to opt out of pension schemes provided by their employer, rather than opt in.
Concern about quality of the scheme
Anyone paying into this sort of workplace pension scheme should feel confident that their money is being well looked after, not lining the pockets of a fund manager. But when Which? investigated, we found that this is not the case.
One third of people in the UK who have opted out of auto-enrolment, or say they will opt out, do so because they do not trust the pension industry to look after their money, and one in five because they are concerned about the quality of the scheme.
Last month, the UK government announced plans for further reform, proposing a cap on administration fees for auto-enrolment schemes.
Pension fund managers apply fees and charges to manage your pension pot, but the rates vary and some schemes are charging well over the odds.
If the company managing your pension is taking high amounts in charges, then your retirement pot could end up significantly smaller than you’d hoped for. Many people might not realise that so much of their money is being taken in fees until it’s too late.
The government has proposed setting the cap on fees at either 0.75 per cent, 1 per cent, or 0.75 per cent with the potential for it to be increased to 1 per cent if providers make a strong enough argument for the extra cost.
We want the government to go further and to lower the level of the proposed new cap, extend the proposals to more schemes and ban other unfair charges. While we strongly support the direction of the government’s plans, there is an urgent need for better minimum standards for all workplace pensions.
Even a fraction of a per cent in fees can have a significant impact on pension funds. We have calculated that if the new cap is set at 0.5 per cent, as opposed to the proposed 0.75 per cent, and extended to cover all new and existing workplace schemes, UK consumers could save around £4.8 billion over the next ten years alone.
This seemingly small percentage change means that an individual pension fund could be £40,500 better off.
We also know that annual management charges can more than double when people move jobs, unfairly eroding the value of their pension pot, and this needs to stop. Our research has shown that some companies were charging 0.5 to 0.7 per cent as an annual management charge for active members, but when an employee left their job the charges could double to 1.2 to 1.5 per cent.
Hands Off My Pension campaign
To better protect people’s retirement funds, we’ve launched the Hands Off My Pension campaign, which calls on the government to: • Set the proposed charge cap at 0.5 per cent.
• Roll out the cap to cover all new and existing workplace pensions.
• Ban hikes on annual management charges when people move to a new job.
Campaigning for fairer pensions does work. Which? has previously called for an end to consultancy charges on auto-enrolment pension schemes. In January 2013, we wrote to the Department of Work and Pensions, the Financial Conduct Authority and the Pensions Regulator, and as a result, in May this year, the government announced a ban on charges for auto-enrolment schemes.
That was a good start. But there is still a long way to go to make sure this market works in the best interests of savers. We want people to back our campaign and support our response to the government’s pension consultation by the end of this month.
If you too would like to say “Hands off my pension”, then please register your support at www.which.co.uk/handsoff.
With consumers squeezed by the rising cost of living, there is no room for rip-off pension schemes. Otherwise we run the risk of people opting out and jeopardising their future financial security.
• Richard Lloyd is Which? executive director