If market competition fails to drive down costs, the government may be forced to cap pension charges, warned pensions minister Steve Webb.
Mr. Webb was speaking at a breakout session at the ABI biennial conference last week and said it still remains an “open question” whether competition will drive down pension charges.
“If we think schemes are charging people too much, say, 1.5 per cent or more and people are not getting value for money, we have the power to set a cap. There is an open question about the extent to which the market will fix this problem for us but we are not just looking at the averages, we are looking at extremes. We will be monitoring what is happening in the market. Charges are an important issue so it is something we will be keeping a close eye on”, he said.
David Pitt-Watson, the chairman of Hermes Focus Asset Management had authored a controversial report last December claiming 38 percent of retirement income is lost in charges.
However, not everybody agrees with Webb. “I do not think the Government should be imposing blanket caps because they do not know the full story. There are isolated cases where a scheme might need to impose higher charges, for example, if it is winding down. The moment you start restricting charges, you move away from the private sector into a pseudo-public sector where people can start to dictate what you are doing”, said Dennis Hall of Yellowtail Financial Planning.
“There may be people who want to build in higher charges after automatic enrolment. If that happened, it would be understandable for the Government to intervene, as they did with the stakeholder cap”, said Robin Keyte of Towers of Taunton.
“There is an excessive preoccupation with charges. Charges, in determining the outcomes people enjoy from their pensions, are a relatively insignificant factor”, said Tom McPhail of Hargreaves Lansdown.