Auto-enrolment could be scuppered by high charges on old schemes

Thursday, 11 October 2012 08:27

By

Pension experts are warning that the government’s flagship pension scheme, auto-enrolment could be a bad idea for some workers and is open to potential mis-selling.

The Pensions Institute warns in a report that if workers are enrolled in existing defined-contribution schemes, they could be subject to the charges and poor returns that has characterised the performance of some of these schemes.

The report calls for high charges on legacy schemes to be abolished and it says that unless safeguards are put in and employers educated about the dangers of high charges of using existing schemes then the whole auto-enrolment project could be open to accusations of mis-selling.

The authors of the report say that the solution is to get rid of high charges on legacy defined-contribution schemes either by legislation or by voluntary agreement so that the charges are no higher than 0.5 per cent.

Auto-enrolment was launched this month, initially for the largest employers, but will be cascaded down to all but the smallest employers. It is not mandatory for employees to sign up to auto-enrolment but the scheme has been introduced by the government to encourage more people to save for their retirement.

It is hoped that up to nine million people will sign up to the scheme by 2018. It is open to employees between 22 and the state pension age who earn at least £8,105 a year.

The Pensions Institute says that if an employer opts to join a scheme run by itself, the National Employment Savings Trust (Nest), B&CE or a new scheme run by an insurance company, they will probably pay low charges of around 0.5 per cent.

However, if they join an existing defined-contribution scheme run by their employer the charges could be much higher, which would discourage employees from joining and saving for their pension.

The report says: "Charges for default funds in large new auto-enrolment schemes generally represent good value, but tens of thousands of employees currently are trapped in the funds of older schemes with high and disguised charges.

"There is a very real danger that smaller employers will use these older schemes for auto-enrolment, potentially bringing millions of new pension investors into poor value default funds.

"Our findings from the quantitative analysis show that the retirement incomes of these in the high-charging schemes will be worth only about an average of 50% of the income achieved by members in low-charging schemes after 40 years of membership.”

The report says that this needs to be explained to employers or they will use existing schemes for auto-enrolment or millions will suffer as a result.

The Pensions Institute is calling for a clearly marked kitemark website that can showcase the best value-for-money schemes.

Professor David Blake, director of the Pensions Institute, said there was plenty of time to make the necessary changes.

He said: "These employers are not required to introduce auto-enrolment immediately but many companies will need to be prepared by mid- to late-2013."

Steve Webb, the Pensions Minister said that he is: “watching pension charges like a hawk”.

He added: “The creation of NEST has prompted new low-cost offers in the market, which is encouraging. But I am concerned about charges in legacy schemes and have challenged the industry to bring these into line with new business.

“I have the power to cap charges and will do so to protect consumers if I need to.”

Free pensions guide

 

Comments Bubble Comments

Twitter: My Finances


Join the conversation at #news_myfinances


Newsletter sign up

Interests

In addition to the weekly newsletter, which areas of finance would you like to hear from us about:

Tick this box if you would like us to send you promotions from carefully selected third parties.

By signing-up you agree to the terms of use and privacy policy.

sign-up button

Get the latest information on: