Regulator welcomes 'significant progress' on pension scheme legacy charges

Out-Law News | 08 Dec 2017 | 12:54 pm | 2 min. read

Costs and charges have been reduced to 1% or less on a further £4.9 billion worth of older pension savings over the past year, the Financial Conduct Authority (FCA) has said.

The FCA welcomed what it said was "significant progress" on the issue of legacy charging, saying that less than £1bn worth of pension scheme assets under management (AUM) remain subject to high charges. Over £25bn worth of AUM were potentially exposed to high charges as of the end of 2014, following a report by an industry-commissioned Independent Projects Board (IPB).

The remaining high costs and charges relate to a "small number" of pension providers which have committed to taking action by next year, along with some cases where the charges are justified given the benefits provided, the FCA said. Both the FCA, which has been working with contract-based schemes, and the government's Department for Work and Pensions (DWP), which has been working with trust-based schemes on the issue, have committed to further work to ensure that unjustifiable high charges are eliminated by the end of next year.

"No one that saves into a pension scheme should have concerns that their savings are at risk of being eroded by excessive charges," said pensions minister Guy Opperman. "That's why we are tipping the balance back in favour of consumers, who will now see their schemes delivering better value and increasing their income in retirement."

Workplace pension schemes used for automatic enrolment are subject to a management fee cap, set at 0.75% of funds under management. This charge cap, however, does not extend to older schemes. A 'legacy audit' of older schemes by the IPB, which reported in December 2014, found that £25.8bn worth of assets were potentially exposed to charges of more than 1%, meaning that savers were not getting sufficient value for money from their pension investments.

The FCA and DWP have continued to work with legacy pension providers since the IPB published its report, in order to bring these schemes into line with the standards applicable to newer schemes. As of December 2016, AUM at risk of high costs and charges had fallen by £20bn, according to a joint report. This has now fallen still further as a result of continued work by the regulators, as well as independent challenge by schemes' own independent governance committees (IGCs) and engagement with trustees.

The government reiterated that it would "legislate, if necessary" if schemes did not take appropriate action on high charges.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that schemes had "made great strides in delivering value in legacy products". This was despite significant "regulatory and other barriers to doing so" faced by insurance company providers of contract-based schemes, which had "thwarted such efforts in the past", he said.

"It would be helpful if insurance companies were given some trustee-like powers to make changes on behalf of customers for charging purposes, and in relation to investments too," he said. "This would help level the playing field for workplace schemes - something that is already well underway in other areas."