The People’s Pension, the second biggest master trust in the UK with more than 4m members, will revamp its fee structure in the summer.
The workplace pension provider is moving from its annual management charge of 0.5 per cent to a banded pricing structure.
The percentage will fall as pension pots grow, giving savers a long-term incentive to stick with auto-enrolment saving and to consolidate multiple pots, The People’s Pension stated.
The charges will be shown in pounds and pence each month in the members online account, it added.
The changes mean an average earner (£30,000 annual salary) saving over their working life (45 years) could see their lifetime fee fall by more than half to 0.23 per cent, potentially increasing their pension pot at retirement by almost £55,000, when compared to a lifetime fee set at the charge cap of 0.75 per cent.
This calculation assumes contributions at 8 per cent of qualifying earnings, an investment return at 5 per cent per year, and inflation at 2.5 per cent per year.
Patrick Heath-Lay, chief executive of B&CE, the provider of The People’s Pension, said the company decided to act in anticipation of contributions rising in April.
Minimum contribution rates under auto-enrolment will increase from 5 to 8 per cent in April, with the employee paying 5 per cent.
He said: "Providers need to respond imaginatively to ensure auto-enrolment is attractive over the long-term, rewards people for saving and incentivises the consolidation of multiple pots.
"Charges can eat away at pensions, and on a flat-rate, percentage fee savers pay a lot more in pounds and pence the more they save.
"We’re reducing members’ annual charges as a percentage of their savings in line with the growth of their pot, potentially boosting their retirement income by thousands."
Guy Opperman, minister for Pensions and Financial Inclusion, said he was pleased to see The People’s Pension taking action to improve the value for money offered to its members.
He added: "I’d encourage all firms to look at what they can do to ensure they keep delivering value as the amounts saved continue to grow."
FTAdviser reported on Tuesday (February 19) that master trust Now: Pensions has defended its charging model after criticism from Labour MP Steve McCabe, who alleged the provider’s structure had "eaten away the entire pot of some of their customers".
The provider charges a £1,50 admin fee per month per member on top of a 0.3 per cent annual management charge. But the problem is the average pot size is small, amounting to a mere £500.
Adrian Boulding, director of policy at Now: Pensions, said by separating the fees, "it is clear to members how much they are paying for investment management and how much for scheme administration and communication."
He added: "It also means that those with larger pension pots aren’t overly subsidising those with smaller pots."