However, pension experts have warned that a reduction in the cap to 0.5 per cent, which is gaining industry support, would expose the charging structure of the National Employment Savings Trust, which could be seen as “expensive” and “a rip-off pension”
Which? is calling for the government to set the proposed charge cap at 0.5 per cent, roll out the cap to cover “all new and existing workplace pensions”, and ban hikes on annual management charges when individuals switch job.
John Lawson, head of policy at Aviva, said that while there is as yet no clarity on what charges would be included within the cap, Which’s 0.5 per cent cap proposal is “extreme”. He added that due to a two-tier pricing structure, Nest is “poor value for money” unless money is held with the provider for extended periods.
Nest’s pricing model comprises an annual management charge of 0.3 per cent and a 1.8 per cent charge from initial contributions, meaning its charges will initially appear high but will fall as a percentage as funds grow.
Mr Lawson said: “It isn’t decided yet what the cap would include but I would expect it to be a total expense ratio including custody and legal costs, but not trading expenses. Nest is very expensive: you would need to be in it for 18 years and three months, any less is poor value for money.
“It costs 0.67 per cent if you are in it for less than 10 years and less than five years in Nest will cost 1 per cent. One year in Nest means you are paying 4 per cent in charges... With dual pricing, you have to calculate the reduction in yield.
“A scheme at 0.6 per cent is not poor value for money. We set a 1 per cent benchmark as it represents good value for money.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, added: “A simple charge cap of 0.5 per cent across the board would make Nest a Rip Off pension, as anyone joining Nest for less than 16 years will end up paying more than 0.5 per cent in total charges.
“This is obviously a ridiculous accusation, Nest is a very good pension scheme set up on competitive terms. Hargreaves Lansdown believes the focus should be on legacy schemes as market forces are already successfully at work on new schemes.”
Last week the Department for Work and Pensions launched a consultation, with the aim of making pensions good value for money.
The government proposed three possibilities: a charge cap of 1 per cent of funds under management; a lower charge cap of 0.75 per cent of FUM, reflecting the charging levels for many schemes; and a two-tier ‘comply or explain’ cap, meaning there would be a standard cap of 0.75 per cent of FUM with potential for higher charges if reasons are explained to the regulator.
Pensions expert Ros Altman previously said even a 1 per cent cap on pensions charges, double that proposed by Which?, will make Nest seem expensive.
Richard Lloyd, executive director at Which?, said: “While we strongly support the direction of the Government’s plans there is an urgent need for better minimum standards for all workplace pensions so people can be confident that they are being enrolled into high quality, good value schemes.
“With consumers being squeezed by the rising cost of living, there is no room for rip-off pension schemes in the workplace.”
Graham Vidler, director of communications at Nest, said: “The Nest charge has been designed to deliver low charges in the context of a long-term saving product. For many types of Nest saver, our charges work out as broadly equivalent to 0.5 per cent AMC over their saving lifetime – a good ‘benchmark’ for low charges currently enjoyed by members of large workplace schemes.
“Most savers will experience a slightly lower rate, particularly if they have contribution breaks, which is ‘typical’ saving behaviour; some savers, if they are enrolled later in life, may experience a higher rate.”
