Warning ‘pounds and pence’ pension charges will hit small pots

Plans to introduce a code of conduct forcing pension fund management fees to be disclosed to savers in a simple "pounds and pence" format may actually end up costing lower-paid members more, industry figures have warned.

The National Association of Pension Funds' (NAPF) plans for more transparent charging could mean wealthier members of defined contribution (DC) schemes will no longer subsidise those with smaller pots, they said.

DC Invest­ment Forum chairman Stephen Bowles said: “If you went to a monetary charge then those bigger pot values would be paying less and the smaller pot values would have to pay more to balance that out.

“We are some way off from having the administrative functionality to be able to deploy that but it is an administrative nightmare to move to monetary charging.”

Currently, under the annual management charge (AMC) system, members with larger pension pots pay far more than those with smaller pots, even if the administration costs are similar.

Standard Life head of pensions policy John Lawson said: “We could tell members charges were £3 in year one and £7 in year two, but it would also expose the level of cross-subsidy. It would effectively force lower earners to pay more.”

Lawson added the cost of administering a DC pension was about £100 a year using a third-party administrator.

He warned the proposed charge would act as a serious deterrent to low-earning members.

Aegon head of regulatory strategy Steven Cameron said: “If you are disclosing to every member how much has come out expressed in pounds, those who have paid in more for longer will be paying an awful lot more.”

Scottish Life business development manager Fiona Tait added: “The percentage approach can favour the smaller pots because at some point if you have a fixed amount it becomes a lot more efficient.”