Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a743258

‘Time to put the saver first’: gov’t confirms 0.75% pension charge cap

The government has placed a cap on charges and banned hidden pension costs that secretly eat away at workers’ savings.

 
‘Time to put the saver first’: gov’t confirms 0.75% pension charge cap

Pensions minister Steve Webb has called time on ‘rip-off pension charges’ by announcing a cap of 0.75% and banning hidden costs in workplace pension schemes.

As the coalition focuses its efforts on encouraging individuals to save for retirement through auto-enrolment, Webb (pictured) said he wanted workplace schemes to deliver value for money by restricting charges.

From April 2015 a 0.75% cap on charges will be introduced. It will be applied to the default funds that workers’ pension contributions are automatically put into. Some workers are given investment options but many do not move their money from the default funds. If a worker chooses a different investment option other than the default fund it may cost more that 0.75%. 

By introducing a cap the government estimates that over the next 10 years an extra £195 million will be saved on costs, meaning individuals will keep more of their money in their pension pots.

Even a small reduction in charge can add up to a significant amount over a lifetime. A worker earning £20,000 would save on average £35,000 over their lifetime if they saved in a scheme with a 0.75% charge compared to a 1% charge. 

The government has also gone further and banned hidden charges in pension schemes. These include payments for sales commission which are deducted automatically from members’ pensions and consultancy charges where members have to pay for advice given to their employer.

It will also prevent schemes increasing their fees for former employees who have pensions with a company they no longer work for.

In a push for transparency pension schemes will have to publish all their costs and the government will later decide if any more costs should come under the cap.

Webb said: ‘Through the new measures, this government will be the first to get an iron grip on pension charges. We are going to put charges in a vice; and we will tighten the pressure, year after year.’

He said that over the next decade millions would be transferred ‘from the profits of the pensions industry to the pockets of savers’.

‘Pension savers have paid too much, for too long. It’s time to put the saver first,’ he said.

19 comments so far. Why not have your say?

nickle

Mar 27, 2014 at 14:50

0.75%.

Now perhaps we can get rid of 0.5% stamp duty. That's doesn't help pensioners.

report this

Briesmith

Mar 27, 2014 at 15:01

Will the cap include the so called "internal" charges which are deducted directly from income and those pro rated as global charges (for general fund advice, insurance etc) or just the declared headline "management" fees?

There are a lot of fingers in the pension charges pie and it would be nice if the legislation when framed was clever enough to make sure all of them are identified and none can remain hidden or passed off under other headings.

We have the scandalous TER or "total expense ratio" (honestly, that's the euphemism they dreamt up to describe their "we will rob you blind" approach) and other mysteries to contend with here; we need to be sure everything is out in the open.

report this

Dave Knight

Mar 27, 2014 at 15:11

All this does is guarantee a race to the bottom. Value for money will never enter the equasion.

If they applied the same process to cars we'd all still be driving Heinkel bubble cars and Mercs would be banned.

report this

alan restel

Mar 27, 2014 at 16:04

Equation!

report this

thinblackduke

Mar 27, 2014 at 16:31

So this means one fund must charge no more than 0.75% and the rest can carry on charging what they want?

Does it affect SIPPS and providers of SIPPS?

report this

Anonymous 1 needed this 'off the record'

Mar 27, 2014 at 16:33

Whilst on the subject of clarity why dosen't the government ban prices which include VAT and only allow prices to be displayed PLUS VAT so everyone can clearly see that the Government is loading the price of pretty much everything they buy by 20% or that people are paying 1/5th more.

Then again everyone would clearly see how the Government is ripping people off and we couldn't have that could we.

report this

Dave Knight

Mar 27, 2014 at 16:40

Sorry, I've sacked the proof reader.

report this

nickle

Mar 27, 2014 at 16:48

Then again everyone would clearly see how the Government is ripping people off and we couldn't have that could we

===========

Pie charts on energy and fuel bills are the way to go. Preferably with the telephone numbers of the local MP.

When people see the breakdown, they would be on their phones, day or night, sober or pissed.

report this

Briesmith

Mar 27, 2014 at 17:09

Dave

What do they do these fund managers? Their performance record is appallingly varied. Most of them are awful with only a few providing reasonable returns but they all charge the same. There has been a race to the top.

I include an extract from the Pensions Regulator's website. It's a longish extract but well worth the trouble reading:

"Common terms on costs and charges

Annual management charge (AMC) and total expense ratio (TER) are the two main terms that financial services firms and pension schemes use to express what costs and charges are being deducted from members’ pots to pay for the services that the firm or scheme provides. Both these terms are usually expressed as a percentage of the members’ investment fund or pension pot. Most DC schemes take a percentage of funds under management: a minority of schemes charge a flat rate per member or a combination of the two.

Portfolio turnover rate (PTR) is the term used to express the rate at which the investments within an investment fund are bought and sold, or ‘turned over’.

It’s important you understand what these terms mean because each will have an impact on investment returns and the size of members’ pots.

You need to know what costs and charges are deducted from your members’ pots to help you assess your scheme’s value for money. For more information, go to value for money.

Annual management charge

The AMC is defined differently by different providers. It may either refer to a charge which is applied by the pension scheme or to charges which are applied by the investment funds used by the pension scheme.

The AMC is a fee which is charged to cover some of the costs of running an investment fund or a pension scheme. It’s a commonly used headline figure but it does not generally include all the costs and charges borne by members. For example, some AMCs may include administration and investment management charges while others may only include administration charges. It is therefore important to understand what is included in the AMC charge of your scheme and its investment products.

You will therefore need to look beyond the AMC to obtain a complete picture of the overall costs and charges of a fund or scheme. Where the AMC is used, you should ensure that you understand what’s included within it and what isn’t.

Total expense ratio

The TER is a broader definition for expressing the costs and charges that apply to an investment fund or pension scheme which is expressed as a percentage of the value of the assets. The TER will normally include the AMC but it’s worked out on a historic basis for the previous year so is able to include other fees and charges which have been applied such as:

•legal and audit costs

•custodial fees

•investment management and administration fees.

The TER is a more complete measure than the AMC of what the member is paying for the services they are getting. However, despite the name, the TER doesn’t capture all the costs and charges that apply to members’ pots. For example it doesn’t include:

•transaction costs incurred when buying and selling investments

•taxes associated with those transactions

•other costs such as those associated with entering or exiting from a fund or a scheme.

It may also exclude adviser commissions.

The TER is sometimes referred to as the ‘ongoing charge’. However, the ongoing charge will exclude any performance fee for the fund manager if they meet any agreed performance targets."

Pretty damning really; says basically you can never know or be sure just what charges have been included and what haven't, never have a true and complete picture of what you are paying your fund manager for their services.

This situation is, hopefully, what the government are seeking to change.

report this

Franco

Mar 27, 2014 at 17:11

Funny it took a Conservative govt. to put a stop to the robbing of the poor by the rich.

Mind you, there are still plenty of loopholes and the next George Idiot Brown can still put the clock back, but it is a start and next time I may even vote Conservative, What?

report this

Dave Knight

Mar 27, 2014 at 18:09

@ Briesmith

I quite agree with you that there are a vast number of sub-par fund managers around. How they manage to attract any new business I don't know, but somehow they do.

The thing is, clients, investors and advisers all have some freedom of choice, which if excercised well will lead to more money being attracted to the better managers. In fairness, different styles will be in and out of favour from time to time (a couple of years ago Neil Woodford was fourth quartile over a year due to avoiding bank stocks) and differing investment mandates will also sometimes restrict managers activity and distort long term credibility while markets don't fit their mandate.

I don't mean this to excuse the huge number of poor funds, many of which are closed and run by the tea lady now, but quality isn't usually cheap.

The ultimate result of driving down charges is that everyone will be more or less forced to adopt a passives driven mandate using a standard asset allocation model that no-one can argue with. Everything vanilla and no chance of outperforming or doing badly against your peers.

Then when everything is run the same way for the same costs, and the difference between the best and worst performers is marginal, everyone's average and we're all happy. Right?

What then will be the point of excercising choice and moving pension funds from one provider to another in the pursuit of escaping mediocrity. When you prevent the best from competing by capping charges you will undoubtedly end up with mediocrity and nothing else.

What good did the 1% Stakeholder cap do? It just led to reliance on Trackers and very cheap managed funds. Driving the cost down to 0.75% will definitely reduce costs, but if that means no-one invests using the more expensive, but better managed funds, most will sacrifice better returns because they think they are getting a good deal.

Value for money is slowly but surely being eroded so that Value will eventually be lost from the equation (with a t).

I don't really envy the current generation of pension savers, as it will become more and more difficult in future to find anything outstanding.

report this

alan restel

Mar 27, 2014 at 18:22

At last! Pension savers are given some responsibility for THEIR money and the dead stifling hand of the nanny state has been lifted a little. More of the same please!

report this

nickle

Mar 27, 2014 at 19:42

Franco.

Now we need a government to stop the poor being robbed by the state

report this

Michael Stevens

Mar 28, 2014 at 16:18

What about introducing a 0.75% cap on all fund managers. ISA, bonds, unit Trusts. Etc.

I had heard it said that St James Place have the Highest charges with trail commission to their Partners. When is this going to STOP?

report this

Aidan Williams

Mar 29, 2014 at 22:41

@Dave Knight

"The ultimate result of driving down charges is that everyone will be more or less forced to adopt a passives driven mandate using a standard asset allocation model that no-one can argue with. Everything vanilla and no chance of outperforming or doing badly against your peers."

But that is *exactly* how a default pension fund should be. No one is stopping you from choosing a pricier alternative, are they?

report this

thinblackduke

Mar 30, 2014 at 08:38

The bottom line is that the charge for a fund has absolutely no bearing on how well the fund will perform. Nobody seems to point that out, when they are hung up on fee costs. Paying 0.75% does not mean you will get a better return than a fund charging 1.5% - and vice versa! You will pay less in fees - that's all. My best return over the past 5 years happens to have come from a HSBC tracker that has a 0.25% fee. My second best performance has come from one charging 1.6%. And I have a whole range of fees being charged on my other funds. Am I going to move everything to my tracker - no!

I can't wait to see the discussions starting up that say the government "made me" use a low fee fund and it's performance has been pitiful. Which, of course, will be countered by others who've used low fee funds, that have had stellar performances.

Investing is only an educated gamble folks!

report this

Edward w

Mar 30, 2014 at 11:02

I think it is high time that the insurance industry is bought to book as they have been robbing us blind for years. you only have to look at the endowment fiasco to realize that.

report this

Briesmith

Mar 31, 2014 at 10:08

The insurance industry is a large bureaucracy just like the civil service or local government, NHS etc and just like those organisations, it is massively inefficient, hugely overstaffed with an emphasis on provider rather than consumer benefits.

But unlike the government related bureaucracies, the heads of insurance companies expect truly enormous rewards for their efforts with top people receiving multi-million pound remuneration "packages".

It is these excesses which are responsible for the income leeching, capital destroying thievery that goes on.

And this is what will have to stop if these companies are to survive and make profits.

report this

Michael Do

Apr 04, 2014 at 15:30

Is it the case that these caps of fees will apply to new members of pension schemes only? We have a pension scheme with net charge of 0.9% being 1.4% less a 0.5% active member discount. With auto-enrolment our provider is saying that new members will have charges of 1% less a 0.1% AMD - but existing members are stuck with what they have. With AMDs and commissions being banned over the next couple of years, will it be the case that staff already enrolled in schemes will completely miss out and be stuck with what they have (unless the company goes through the costly - in time and upfront fees - process of switching, no mean feat with the 'capacity crunch')?

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

More about this:

Archive

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

Fidelity China trust turns it round in turbulent year

by James Carthew on Dec 22, 2014 at 10:50

Sorry, this link is not
quite ready yet