The UK government has put forward proposals for a major shift in occupational pensions to make it clearer. However, she acknowledged the change could potentially make some savers worse off.
Experts said the move would likely pave the way for further reforms that would give the 29 million workers in such systems more freedom to switch to cheaper retirement plans.
Pension insurers can currently choose from various fee structures for employees, which are automatically included in a “standard” pension fund by their employers. This includes a single percentage fee for the pot value or a combination of percentage fees with annual, monthly, or subscription fees.
On Monday, ministers revealed plans to ban combination charging models and instead introduce a single charging structure in the market for automatic registration.
“We said we would look into 2021 how we could make it as easy as possible for retirement savers to have access to comprehensive and transparent information about costs and fees,” said Guy Opperman, Secretary of State for Pensions.
“I believe that moving to a single, universal fee structure in the future could greatly improve the transparency of fees, facilitate comparison and give members more choice.”
Experts estimated that around 17 million pension pots would be affected by a ban on combined fee structures, including those held at Nest, the government-backed £ 16 billion scheme with more than 10 million members.
Nest currently charges a fee of 1.8 percent for each new contribution to a member’s retirement pot and an annual management fee of 0.3 percent on the total value of a member’s fund per year.
In its analysis, the government said that moving to a universal fee structure would mean that some members currently paying a combination fee would be “likely to pay more” if charged under a single annual percentage fee.
A 2019 analysis by the Pensions Policy Institute, a think tank, concluded that combination fees generally performed better for savers over time, especially after more than a decade of contributions.
In contrast, members with lower value pots can see charges fall under a universal charge structure.
However, experts said further reforms could pave the way for savers to switch to better business if they lose under simplified fees.
Currently, employers are not required to pay their minimum 3 percent contribution to the employee’s pension if an employee decides to switch their savings to an off-the-job plan.
During the consultation, the Department of Labor and Pensions said it would “consider carefully” how an employer can influence or influence a member’s preference to exchange money, if at all.
Becky O’Connor, director of annuities and savings for interactive investors, an investment platform, said, “This consultation paves the way for more competition, freedom of movement and ultimately better value for people who invest in annuities.”
David Robbins, director of Willis Towers Watson, the professional services company, said, “The DWP does not specifically say that it could force employers to redirect contributions to a provider of the employee’s choice, but that appears to be the caption.”
Steve Webb, former Secretary of Pensions and now a partner in the actuarial firm Lane, Clark & Peacock, welcomed proposals to simplify fee structures but said the government must “be very careful” before proceeding.
“Allowing members to look for a different annuity insurer could add significantly to the burden on employers and destabilize the entire basis on which auto-enrollment was set up,” he said.