There has been considerable discussion about the correct charging level for auto-enrolled pensions. But the debate is currently far too narrow and is missing some key issues.
These issues can only become more important as more smaller companies offer pensions to their employees.
The main focus remains the annual charge cap which the government wants at 0.75 per cent and Which? wants at 0.5 per cent.
These seemingly innocuous charges can have a massive impact on a pension.
It is not just a question of saving £25 a year on a £10,000 pension, it is the compounded effects of the lost investment growth on that money that really hurts.
Yet the argument that lower charges could mean less choice is a powerful one.
But why has all the discussion been about investment charges rather than looking at what happens at retirement?
It is almost as if the issue has been swept under the carpet or filed under ‘too difficult’.
As pensions commentator Ros Altmann said: “It seems the charges debate has lost sight of the wood for the trees.”
The wood in this case is an annuity charge which she puts at between 2 per cent and 3.5 per cent of the whole pension pot.
Low-cost pensions are all very well but that money is to fund the retirement of the investor and not to line the coffers of an insurance company.
Annuities remain one of the most opaque investments. We do not know for sure how much insurance companies make from an annuity sale because most will not tell us.
But the fact that they seem so wedded to them suggests they are making rather a lot.
The annuity market demonstrably does not work, therefore the costs must be capped to protect the consumer.
We currently have the ludicrous situation where an annuity bought directly from the supplier can be more expensive than one bought with financial advice.
That is very nice if you are a financial adviser but it makes no sense at all in market competition terms.
Skandia’s recent Adviser Insight survey revealed that more than two-thirds of 700 financial advisers questioned felt that the annuity system was failing consumers. Yet 400,000 people take one each year.
It is time the focus of the auto-enrolment debate was widened so we do not have to revisit the issue again a few years hence.
Muppets wait in the wings
The recent consultation document on workplace pensions issued by the department for work and pensions touted defined ambition pensions based broadly on the Dutch model as a third way.
Once again our very able pensions minister Steve Webb appears to have listened and understood advice and is attempting to come up with a plan that could appeal in the real world.
This is a remarkable step forward from the last government which washed its hands of final salary schemes, except its own and those run in the public sector at the expense of taxpayers.