Cap on charges welcome – but be aware of hidden costs

The RSA Tomorrow’s Investor programme welcomes the government’s decision to introduce a cap on occupational pension charges.

The RSA Tomorrow’s Investor programme welcomes the government’s decision to introduce a cap on occupational pension charges.

The announcement follows a five year campaign by the RSA to reduce hidden costs levied on British pensions, including significant representations to the DWP select committee and the Department of Work and Pensions.

The RSA’s July 2012 report Seeing through the British Pension System called for greater transparency including the declaration of hidden costs, such as those associated with buying and selling shares.

View Seeing through the British Pension System report

The RSA report found that purchasers of personal pensions are currently being misled about the level of hidden costs and charges, with 21 out of 23 providers denying there were any additional charges other than the annual management charge (AMC) and administration costs.

“We welcome the government decision to cap charges on auto-enrolment schemes. But as ever, the devil in the detail. At present much of the discussion centres on the level of the cap. We also need to ensure that other protections are in place to ensure that all pensions are adequately managed. For example, that they are invested in appropriate assets, and that the assets are held in separated accounts. These are just basic provisions for any safe pension regime."

Commenting on the cap level, Dr Hari Mann of the Tomorrow’s Investor project said:

“A 0.75 percent cap on basic charges is a good start. However the government needs to look at any hidden costs, which can be very high. These need to be fully disclosed. Many in the industry are commentating that fees today are at an all-time low. We are not sure there is reliable evidence for this, but if it is true the industry should have nothing to fear and should be supportive of such a cap.”

Seeing through the British Pension System uncovered how the costs declared in the AMC are not the only charges savers need to pay. Audit and custodial costs are often charged separately, and further hidden costs often associated with trading shares, including taxes, stock lending fees and broking commissions are currently not being declared.

Furthermore, even when costs are declared, it is not done in a way in which typical pension savers are likely to understand. The enormous impact of fees, where a 2 percent annual charge can result in a halving of pension benefit is not understood by individual consumers or by small employers, the report concluded.

Other RSA Tomorrow Investor reports such as Building the consensus for a People's Pension in Britain, previously found that:

• A huge proportion of our pensions disappear in fees – with charges swallowing up to 40 percent of the value of the pension.

• If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 percent higher income in retirement.

• That minor changes to our regulatory framework could boost pension returns by 39 percent

View Seeing through the British Pension System report

Notes to editors

1. For more information contact RSA Head of Media Luke Robinson on 020 7451 6893 or 07799 737 970 or luke.robinson@rsa.org.uk