The UK government has unveiled proposals for a major shake-up of workplace pension charges to make them clearer, but conceded the change may leave some savers worse off.
Experts said the move would likely pave the way for further reforms that would give the 29m workers on such schemes more freedom to switch to better value retirement plans.
Currently, pension providers can choose from several different charging structures for workers automatically enrolled into a “default” pension fund by their employers. These include a single percentage charge of the pot value or a combination of percentage based fees with annual, monthly or contribution charges.
On Monday, ministers unveiled plans to ban combination charging models and instead impose a single charging structure across the auto-enrolment market.
“We said that in 2021 we would look at how we could make it as easy as possible for pension savers to have access to comprehensive and transparent information on costs and charges,” said Guy Opperman, pensions minister.
“I believe that moving, in the future, to a single, universal charging structure could make a significant difference to the transparency of charges, make comparison easier, and unlock greater choice for members.”
Experts estimated that about 17m pension pots would be affected by a ban on combined charging structures, including those held with Nest, the £16bn government-backed scheme, which has more than 10m members.
Nest currently levies a charge of 1.8 per cent on each new contribution into a member’s retirement pot alongside an annual management charge of 0.3 per cent on the total value of a member’s fund each year.
In its analysis, the government said that moving to a universal charging structure would mean that some members currently paying a combination charge were “likely to pay more” when charged under a single annual percentage fee.
A 2019 analysis by the Pensions Policy Institute, a think-tank, concluded that combination charges generally provided better outcomes for savers over time, particularly after more than a decade of contributions.
In contrast, members with lower value pots may see charges fall under a universal charging structure.
However experts said further reforms could pave the way for savers to switch to a better deal, if they lose out under simplified charges.
Currently, there is no compulsion for employers to pay their minimum 3 per cent contribution to the employee’s pension if a worker decides to shift their savings to a non-workplace plan.
As part of the consultation, the Department for Work and Pensions said it would “carefully consider” how an employer may influence or affect, if at all, a member’s preference to switch funds.
Becky O’Connor, head of pensions and savings for interactive investor, an investment platform, said: “This consultation paves the way for more competition, greater freedom of movement and ultimately better value for people investing into pensions.”
David Robbins, director with Willis Towers Watson, the professional services firm, said: “The DWP does not explicitly say that it might force employers to divert contributions to a provider of the employee’s choice, but this appears to be the subtext.”
Steve Webb, a former pensions minister and now a partner with actuarial firm Lane, Clark & Peacock, welcomed proposals to simplify charging structures but said the government needed to “tread very carefully” before going further.
“Allowing members to shop around for a different pension provider could add considerably to burdens on employers and could destabilise the whole basis on which automatic enrolment was established,” he said.