Excessive charges on legacy pension schemes set to be ‘a thing of the past’
A pension scheme is considered to be high charging where it costs more than 1% per year to run. High charges can eat into your investment return over time. For example, a pot of £100,000 would be worth £338,633 after 25 years at a charge of 1%, but just £266,583 at a charge of 2%.
The government and Financial Conduct Authority started to target excessive fees four years ago. A report published by an independent project board, commissioned to investigate high charges, found that £25.8bn of assets in defined contribution workplace pension schemes were potentially exposed to charges of more than 1%, failing to give savers value for money. This has now been reduced by over 90%.
This has been achieved by the government and the FCA working closely with pension providers to bring legacy schemes in line with the standards of new workplace pension schemes, introduced since the launch of auto-enrolment.
Guy Opperman, minister for pensions and financial inclusion, said: “No one that saves into a pension scheme should have concerns that their savings are at risk of being eroded by excessive charges.
“That’s why we are tipping the balance back in favour of consumers, who will now see their schemes delivering better value and increasing their income in retirement.”
The independent project board found that these pension schemes, which were not covered by the government’s pension charge cap on workplace pension schemes used for auto-enrolment, were charging excessive amounts for annual administrative charges, without justifying the extra costs.
Of the £25.8bn of assets covering 1.5 million pension pots, between £5.6bn and £8bn was potentially exposed to charges above 2%. Nearly £1bn was potentially exposed to charges above 3%. The highest charges were often found where the scheme had members with small pension pots worth less than £10,000.
The government and FCA continue to work with the small number of remaining providers to eliminate high costs and charges by the end of 2018, and has been clear that it will legislate, if necessary.