Proposed workplace pension management charge cap is too high, says Legal & General

Legal & General said that by allowing providers to charge 0.75% of the value of assets under management in annual fees, the Government risked that savers in legacy schemes would be treated unfairly compared to new savers. Instead, it has called on the Government to lower the cap to 0.5% of the value of assets under management.

"The Office of Fair Trading (OFT) state typical new auto-enrolment schemes actually charge 0.51%," said John Pollock, the company's chief executive. "Having a cap at a much higher figure will have no impact on new pension schemes, and will result in legacy savers being treated unfairly compared to new savers."

"Legal & General is in favour of having a meaningful cap at 0.5%, not only for new auto-enrolment schemes, but for legacy pension schemes as well. It is here in the legacy world that savers maybe getting a poor deal, with fees at much higher levels. Competition is driving down the cost for new auto-enrolment schemes, but is having no real impact on legacy schemes because employers have historically rarely switched suppliers," he said.

His comments came ahead of the closure of a consultation on the future of pension scheme charges, being carried out by the Department of Work and Pensions (DWP). The DWP's consultation set out three proposals for a charge cap: 0.75% or 1% in all cases, the latter reflecting the cap that applies to charges on stakeholder schemes; or a standard cap of 0.75% which could be increased to 1% if the employer could justify the need for higher charges to the Pensions Regulator.

The cap as proposed would initially apply to employers who start auto-enrolment from April 2014; and would then be extended to those who started auto-enrolment earlier. Pension scheme charges have fallen in recent years, and the average charge on a new scheme is around 0.51%, according to Government figures. However, the OFT has estimated that over 186,000 pension pots with assets of £2.65 billion are subject to an annual charge of above 1%.

The DWP has also been seeking views on a number of possible measures to increase transparency in the pensions sector, so that smaller employers have all the information they need to be able to select an appropriate pension scheme for their workforce. Issues it has consulted on include whether to legislate for annual disclosure of charges to members in annual benefit statements, and to employers when they select a scheme; whether disclosure requirements should extend to transaction costs; and whether to extend previously-announced bans on active member discounts, consultancy charges and adviser commissions.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that although most of the pensions industry understood the need for a cap, the Government would have to be careful not to set this too low.

"Actual experience or fear of high charges can put savers off pensions for life, while a cap on charges can boost confidence and contribute to the success of auto-enrolment," he said. "However, a new cap should be set at a realistic level that leaves some scope to pay more for above average performance and service levels. Pushing down charges too far could result in a narrower choice of poorer qualities schemes that ultimately deliver less for members."