Hope it's ok to do this - I suppose it does mean people are informed about their campaign and more likely to spread the word. As I mentioned - it is quite long
INSURERS will continue to cream off tens of millions of pounds a year in excess profits from pension savers despite the government’s proposals to cap charges on retirement funds.
Millions could actually see their plan costs rise as a result of the changes, pension experts have predicted.
The proposals from the Department for Work & Pensions (DWP) should ensure that employees who are automatically enrolled into workplace schemes from April 2014 will not be penalised by high charges.
The DWP plans to outlaw charges higher than 0.75% a year. This, compared with a typical 1% levy, would cut the lifetime pension bill of someone investing £300 a month into a scheme over 46 years by £112,000.
However, of the 3.5m people who began contributing to company pensions before 2012, more than 1m may be left trapped in plans with high charges, according to the pension consultant Hymans Robertson. It calculated that these workers will pay £75m a year more than if they had benefited from the 0.75% cap.
Millions more staff whose employers negotiated a good deal look set to see costs rise, as members of larger workforces are made to subsidise those in small firms. The 1.7m who have already auto-enrolled must wait a year longer than new recruits for charges to be cut.
What has been proposed?
The government last week published a consultative paper about its plan for a 0.75% cap on charges. It is also seeking views on a two-tier pricing policy that would allow for more expensive options, provided customers were given an explanation justifying the higher charges.
The DWP estimates that in five years, an extra £11bn a year will be flooding into insurers’ coffers as a result of auto-enrolment. However, the big profits for insurers come from the fees they levy on older funds.
A report last month from the Office of Fair Trading suggested that about £30bn is trapped in old-style legacy funds that charge more than 1% — some significantly more. On top of this, £13.4bn is being squeezed out of “deferred” savers who have changed jobs but stayed in contract-based plans. More still are invested in trust schemes.
What could be the impact of a cap?
Not only will these easy profits be squeezed if companies are forced to slash charges, but a cap of this order will force them to set aside additional capital.This will provide a powerful incentive to claw back lost profits from a large book of older pensions, while also pushing up charges for newer customers benefiting from keen pricing. Some employers have used their muscle to negotiate big discounts for current staff, who are charged as little as 0.2% a year, although this can rise to 1% or more if they leave the company.
According to John Lawson of Aviva, insurers will have to put aside about £1bn of additional capital to cover the guarantee of lower charges. He said: “Spread across existing customers, this may seem a small sum, but if you are paying 0.4% now, this might have to go up to 0.6%.
“Currently, charges are set according to how attractive the scheme is to an insurer. The bigger the scheme, the greater the economies of scale. But the size of the individual contribution will also have a big impact, as will the stability of the workforce. Companies that have enjoyed beneficial terms may see costs rise.”
What isn’t covered by the proposals?
About 1m pension savers are members of old-fashioned contracts that may not be covered by the cap, according to figures calculated by Hymans Robertson for The Sunday Times.
Chris Noon, a partner at the consultancy, said: “This money represents pure profit for the insurers. The worry is that rather than switch these savers into cheaper contracts, they will close the schemes and put new savers into cheaper plans that comply with the law.”
It is those trapped in pre-2001 “legacy schemes”, or those who have switched jobs and are paying deferred member surcharges (or active member discounts), who suffer most from high charges.
The Association of British Insurers has agreed to conduct an audit to identify the scale of the problem, but work may not begin until the end of 2014. The government is consulting on a ban on active member discounts, but there is no timetable for this.
Any other concerns?
Advisers have questioned the quality of investment management that can be provided at a 0.75% level of charges. Laith Khalaf at the adviser Hargreaves Lansdown said: “You can provide a tracker fund for this kind of change, but I do not see how you can opt for active management. That is fine if you do not want active management, which costs more, but performance may suffer.”
Adrian Boulding, Legal & General’s pension director, said the government’s proposals did not go far enough. “In our view, no one should have to pay more than 0.5% for an auto-enrolled pension,” he said.
How can I avoid overpaying?
If you are a newly auto-enrolled, ask about charges and make sure you have not been forced into an older scheme with higher charges.
If your pension started before 2012, write to your employer or insurer to check the charges. If it emerges that your charges are higher than 0.75%, ask your employer what it is doing to bring them into line with the government’s proposed ceiling
Before making changes, always check that your pension does not have any underlying guarantees or other attractive features. For example, many pre-2001 company pensions took the form of with-profits contracts with a guarantee of a 4% annual return.
Ask your trade union or staff body for assistance and, when questioning your employer or pension provider about charges, always inquire about the timetable for the completion of any changes.
