Earlier today, I had the pleasure of announcing in the House of Commons a raft of new measures designed to make sure that when people save for a pension they get value for money.
One of the Coalition’s most successful policies, for which I have had lead responsibility, is the introduction of ‘automatic enrolment’ into workplace pensions. Starting with the biggest firms in October 2012, and reaching the smallest ones by 2017, employers now have a legal duty to put their workers in a pension scheme and to make an employer contribution which is topped up by an employee contribution plus tax relief. Workers are free to opt out at this point, but a staggering 90% are choosing to stay enrolled. Since the policy started we have got an extra three million workers into pensions, and by the time it is fully rolled out we could be up to getting on for nine million.
One important gap is that there is virtually no regulation of the quality of these schemes. Although big employers have negotiated effectively for their workers (and have buying power when talking to pension providers) we cannot be certain that people who work for small firms will necessarily get value for money. Labour failed to legislate at all on this issue, but today we have announced a tough clampdown on ‘rip-off’ pension charges.
In particular:
- from April 2015, no-one in an automatic enrolment pension scheme (and whose money is in the ‘default’ investment fund) will face charges of above 0.75% per year;
- a whole raft of types of charge will be banned altogether over the next couple of years, including charges for sales commission and the hidden charges that are increased when people move firms and leave money behind in their previous pension scheme;
- we will shine a bright light on the murky recesses of the pensions industry with new legal duties on ‘transparency’ of charges, especially the often hidden ‘transactions costs’ which arise when your money is invested by someone else;
- we will look again in 2017 at whether the measure of charges needs to be broadened and whether the cap needs to be lowered further
- ;we are undertaking a review of the oldest ‘legacy’ schemes which have the highest charges and will take further action on these as appropriate once we know the full details of how they are working;
We will also make sure that in all types of pension scheme there is someone acting in the member’s interest. This could be a trustee or it could be a new ‘independent governance committee’ to oversee the schemes run by insurance companies.
As a Liberal Democrat working for a fair society, I am proud to be taking forward measures which will divert around £200 million from the excess profits of the financial services industry to the pockets of savers. Coming on top of our exciting reforms to the state pension system and the bold freedoms announced last week in the Budget, I believe that pensions reform will prove to be one of the lasting positive legacies of this government.
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15 Comments
Very very welcome. It’s worth emphasising that these are not new problems – the financial services industry has always taken a big bite out of these pensions in various ways – and previous governments have been quite happy to let them. It was a little less noticeable when interest rates and returns on shares were better but that is no excuse.
Well done Steve
It’s also worth pointing out that employers, including small SMEs, will be administering the scheme at no charge, as well as making pension contributions, so there will be an increase in the employment cost base. There will also be a reduction in aggregate demand in the economy from the increased pension saving. Whether this is the best strategy depends on whether one takes a monetarist or Keynesian view of the economy. It would be useful to quantify these two factors.
I’m strongly against this article and think it is misleading. You criticise the financial services industry for looking after themselves, but you are doing the same with your misleading rhetoric about the industry.
You know full well the only real way to help savers is to increase interest rates.
You are putting more regulatory burdens onto small firms.
Why should small pensions be looked after for 0.5% per annum? Are the Lib Dems now against remuneration? Should people service them for pennies?
Your article would have been better if it told both sides of the story.
Joe, I don’t know what you are talking about, “the financial services industry has always taken a big bite out of pensions” – should we criticise footballers for taking a big bite out of ticket prices? It’s a ridiculous one sided anti business article.
What I find so offensive and unfair is why financial services SMEs and employees should be smeared. What makes you more ethical than us? If you were in the industry would you be happy with this smearing? Or if you were in the industry would you not take offence at politicians painting misleading pictures of the industry in an attempt to win votes? Perhaps we just shouldn’t have a financial services SME industry. Lib Dems are still not friends of business or the private sector.
I didn’t want to write another comment, but Steve Webb should be accountable to this comment I just read in the Telegraph?
“Through the new measures this government will be the first to get an iron grip on pension charges. We are going to put charges in a vice and we will tighten the pressure year after year.”
Sounds like he wants to kill the industry. Is there any excuse for such rampant populism?
The full article:
http://www.telegraph.co.uk/finance/personalfinance/pensions/10726829/Excessive-pension-charges-capped-in-full-frontal-assault.html
What about this pensioners’ saving bond. Is it really fair to restrict such a thing to pensioners? It’s certainly gone down well with the Tory base however. Steve Webb may have done more in the last week for the Tories’ popularity than David Cameron has managed in 4 years.
Eddie, I might be a typical private sector pensioner. After 25 years in the same company paying 10% via salary sacrifice to end up with a six figure pot I get less from an impaired life annuity than I do from the state pension, not opted out. I also have a small drawdown from escaping from Equitable Life. Do I think the industry and my employers advisors had my best interests at heart, do I f…
Peter, all I’m asking for is balance. Trying to provide a decent safe income in a low interest rate environment is pretty much impossible.
Eddie, have you read OFT report (pdf here http://www.oft.gov.uk/shared_oft/market-studies/oft1505 ) which describes in some detail and with much restraint, the failures of competition, hidden charges, etc.
These reforms are about making competition work better. It is not anti-business to demand fair trading. This is the difference between believing in free markets on the one hand, and serving corporate interests on the other.
Joe, no I haven’t read it, but I will if I get the time. I’ve seen horrendous practices in the industry, so I don’t believe what Farage seems to think that the customer is always king, but at the same time, the industry does lots of good and people should not try to scapegoat the entire industry for low interest rates and quantitative easing.
Joe Otten – You may well be right. But wouldn’t quantitative tightening do the job just as well?
I thought the Lib Dems (and specifically, Joe Otten) were opposed to the idea of government imposing price caps on private markets?
At least, they are when Labour suggest it.
This fellow looks like another Huppert- look at this progressive stuff!
The “big announcement” shouldn’t even have been in the budget. It wasn’t even ready. Should have been a consultation, with the OBR doing work on it.
All about short term politics
1) Spend you own money, blah, blah
2) Make pensions a controversy so you can do the “Gordon Brown nicked my pension” rubbish.
3) Cash for the Treasury much quicker.