The cost of pensions saving: a responsible capitalism issue
Earlier this week the Labour Party stepped up its campaign against high charges in the pensions industry. It seems this issue has, rightly, become central to Ed Miliband’s ‘responsible capitalism’ agenda.
The TUC strongly supports automatic enrolment into workplace pensions – and indeed this was a policy first established by Labour in government – but it is worth remembering, as DWP research shows, that a lack of trust in the pensions industry was one of the reasons that so many workers became disengaged from pensions saving in the first place. High and opaque charges are a key element of this trust deficit.
So too is what the Kay Review has described as ‘an explosion in intermediation’. The investment chain has become longer with custodians, asset managers, trustees, investment consultants and independent financial advisers all adding to the cost of providing pensions.
The TUC’s own campaign on consultancy charges is clearly a responsible capitalism issue. It would be wrong for employers to pass on, to their workers, the cost of financial advice they receive in advance of establishing a workplace pension scheme.
It is worth listing in full Labour’s recommendations:
Tackle the worst offenders:
- Some savers are trapped in old-style pension schemes laden with excessive charges of up to 4 percent and huge exits fees. We would cap these charges at a maximum of 1 per cent
- The Government already has powers to cap most charges from the 2008 Pensions Act. But some of the highest charges are not covered by this legislation. We would amend the Act to ensure that we can cap these charges
Introduce greater transparency:
- We would amend legislation and regulation to force all pension funds to offer the same simple charging structure so that consumers know the price they will be paying before they choose a particular scheme
- Costs which are hidden at present would be made clear to savers with a single figure expressed – in both percentage and cash terms – for how much will be charged this year, as well as a projection for how much will have been lost at the point of retirement
- We would call on the Office of Fair Trading to probe anti-competitive practices in the pensions industry
- We would allow more people the choice to enrol with NEST – the low-cost public alternative – to drive down prices
The industry is already taking forward some of the transparency agenda. The National Association of Pension Funds’ code of conduct on disclosing charges to employers choosing a workplace pension scheme product will represent a significant step forward. So too is the publication of the Investment Management Association’s guidance on ‘enhanced disclosure’ of transaction costs.
But it is vital that the government retains the option to cap charges and introduce disclosure requirements through legislation, should self-regulation fail to deliver.
And Labour is right to call for an end to the restrictions on NEST (i.e. the contribution cap and ban on transfers). There are already signs that NEST’s introduction has driven down charges. If the pensions marketplace is to become more competitive, which would help to alleviate some of the problems Labour has identified, then as a low-cost provider NEST must be able to compete across the whole market.