OFT report into pension charges expected to propose a 1% cap
How does that square with NEST’s 1.8% initial charge?
NEST charging structure needs urgent overhaul as it can be poor value
The long-awaited report from the Office of Fair Trading, assessing the charges levied on UK pension plans, is about to be released and is expected to recommend a cap on the charges for UK pensions probably of 1%.
This recommendation would raise a number of issues. It is vital to be clear which charges are covered by the cap. Currently, there is a confusing array of cost measures. The standard ‘Annual Management Charge’ or AMC only covers part of the costs, while even the ‘Total Expense Ratio’ (TER) does not actually include the total expenses. Unless customers are clear what costs they are paying, and what the cap includes, this recommendation will not be sufficient to ensure better value. Indeed, it is more than ten years since stakeholder pensions were originally introduced with a 1% charge cap, so little progress seems to have been made in terms of customer value, even though expected returns have fallen significantly since then.
But more importantly, a charge cap of 1% exposes just how expensive the National Employment Savings Trust (NEST) is. The Government established NEST as a national scheme that will ensure all employers can access a pension scheme for their staff. Taxpayers have already spent hundreds of millions of pounds setting it up. Yet this government-sponsored scheme charges far more than 1% for many workers.
NEST takes 1.8% out of every worker’s contribution. There is then an ongoing annual charge of 0.3%. The Treasury apparently insisted on a high up-front charge in order to try to recoup the taxpayer loan to NEST as quickly as possible. However, the value offered to NEST’s members has been compromised and the charging structure needs to be urgently rethought.
Any worker who does not stay in the NEST scheme for many years will be at risk of paying much higher charges in NEST than in other schemes, and possibly even more than the 1% cap that might be imposed. NEST only works out better value if the 1.8% charge can be spread out over around ten years or more. But older workers who are automatically enrolled may not be able to remain in the scheme long enough to overcome the initial fee.
The OFT inquiry is right to shine a spotlight on high charges and value for money for pension savers. But the Government itself must re-examine its own practices and urgently consider changing the charging structure for NEST. A flat fee of 0.5% would be much fairer and could even result in more revenue for taxpayers by increasing its attractiveness and bringing in more members.
At the moment, the NEST scheme appears expensive relative to many private pension providers. Anecdotal evidence suggests many employers have rejected NEST for its auto-enrolment scheme. The membership of NEST is below initial expectations and, although its restrictions are being lifted in 2017, a reformed charging structure would make NEST far more attractive to use. This could ultimately ensure that more employers use NEST and that taxpayers recoup their loan more quickly.
Or am I missing something?