A Department for Work and Pensions (DWP) consultation, announced by pensions minister Steve Webb in parliament yesterday, includes three options:

• Retaining a higher charge cap of 1% of funds under management – reflecting the current stakeholder pension cap for certain scheme members

• Installing a lower charge cap of 0.75% of funds under management – reflecting the charging levels already being achieved by many schemes

• Or a two-tier ‘comply or explain’ option. There would be a standard cap of 0.75 per cent of funds under management for all qualifying schemes. A higher cap of 1 per cent would be available to employers who reported to the Pensions Regulator why the scheme charges in excess of 0.75%.

The government said it is possible that any final cap could lie somewhere between the two levels suggested, depending on the evidence received.

Webb said: “The government believes that enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges. We are consulting on a cap on pension charges. A range of options will be on the table including an outright ban on all charges above 0.75% per year.

“I’m confident that we will make the system fairer for anyone being automatically enrolled into a workplace pension and will finally address the issue of charges which has been neglected for far too long.”

A briefing from the Treasury said while charges for new schemes have been coming down in recent years there are still a “number of outliers that are failing to deliver value for money for savers”.

For example, while the average charge on new pension schemes set up in 2012 is around 0.51% the Office of Fair Trading estimates that there are more than 186,000 pension pots with £2.65bn assets are subject to an annual charge of above 1%.

The Treasury said in the case of someone who saves throughout their working life (46 years at £100 per month), a 1% charge could eat up almost £170,000 from their pot, and more than £230,000 with a 1.5% charge.

The same person could end up having considerably more money in their pot with a lower charge – an additional £66,000 at retirement with a 1% charge, and an extra £100,000 with a 0.75% charge, compared to a 1.5% charge.

Auto-enrolment will result in between six and nine million people saving for a pension through their employer. The government estimates the amount being saved into workplace pensions will rise by £11bn a year.