Current system allows employers to transfer costs of financial advice on to employees, as MPs recommend single regulator to oversee workplace pensions
“Damaging” pension charges which can wipe huge chunks from people’s retirement pots and undermine confidence in saving must be banned, MPs have urged.
The Work and Pensions Committee also wants to see a single regulator taking charge of workplace pensions in order to strengthen protections as millions of workers enter into retirement saving for the first time.
Up to 9 million people will be newly saving or saving more as a result of the government’s landmark efforts to tackle the pension savings crisis by automatically placing people into workplace pensions.
But the committee warned that the majority of these people would be placed in schemes where they bore all of the investment risk – and many would be ill-equipped to deal with the “complex and confusing world of pension saving”.
It called for a ban on a practice in the current system which allows employers to offload the costs of financial advice given to them to help them choose and manage a pension scheme on to their employees, in the form of extra “consultancy” charges on workers’ pension pots.
The report said an example of how high these costs could be from consumer group Which? included an initial charge to each scheme member of £600 over 12 months, followed by an ongoing £60-a-year charge.
Which? said that if such practices happened every time someone switched jobs and enrolled into a new pension they would see large amounts of money disappear.
The government has said it would expect that a consultancy charge should only be applied where advice “leads to a tangible benefit for its members”.
But the provision of pensions advice to employers is unregulated and there is no clear guidance as to what is considered a “reasonable” charge, the report warned, and such charges have “the potential to cause serious consumer detriment and to damage confidence in pension saving and auto-enrolment”.
The committee also wants to see an end to “active member discounts” – a practice whereby some schemes bring in higher charges for people who stop contributing to a pension pot, usually when they change jobs, but leave their fund in the scheme.
Which? research has found that some providers double their annual management charges for a pension pot when someone leaves their job. It said this could reduce someone’s pension income by a quarter.
Pensions expert and former director general of Saga Ros Altmann said: “There is a long way to go before workers can be assured that auto-enrolment will work in their interests, rather than in the interests of the pension providers.”
She added: “We must not let these unsuspecting workers down.”
The committee also said the workplace pensions industry would be better regulated if just one body had responsibility for overseeing it, to give pension savers “the level of consistency and protection they need”.
The government confirmed on Tuesday that pension pots worth less than £10,000 would automatically move with workers when they changed jobs, under its plans to boost the size of people’s retirement incomes and get them saving into one “big fat pot”.
But the committee said it was concerned about the potential of this system to automatically shunt pots which were being held in good value schemes into poor ones.
It also said that the government, regulators and the industry should work to together to make information about pensions clearer and easier to understand.