MPs urge DWP to review scope and level of charges cap

Decumulation investment pathways, as suggested by the FCA, should have a maximum cost of 0.75 per cent, while the level of the existing charge cap should be reviewed by 2020, the select committee said.

In its wide ranging pension costs and transparency report published on Monday, the committee, chaired by Frank Field, urged reforms on charges, dashboard, net pay, and investment government committees.

Without an effective costs disclosure regime it is needlessly difficult for pension savers, and the trustees and employers that represent their interests, to know what costs are being applied

Andy Agathangelou, Transparency Task Force

Mr Field said: “The select committee is calling on the government to shine the searchlights into that part of the financial industry that has settled down to misinforming, mischarging, overcharging and making a fat living off the hard-earned savings of pensioners.

“Government and regulators should not wait for the industry to fail to act voluntarily as they have so many times in the past. It must put the full force of the law behind such changes.”

Opacity prevails in investment

The inquiry found that some trustees are making investment decisions when they simply do not know the true scale of the costs that they are incurring. This is coupled with asset managers’ unwillingness to disclose all the explicit and implicit costs attached to each investment.

“It is near impossible for investors to figure out how much their investments are costing them because additional costs are hidden and too high,” the committee said.

The report notes the charge cap of 0.75 per cent on defined contribution pension schemes used for auto-enrolment has not caused charges to rise to the level at which it was set, with average charges being between 0.38 and 0.54 per cent depending on the scheme type.

However, the committee raised concerns over those fees not included in the cap, and the permission of flat fees plus a percentage, as used by providers like Now Pensions.

This combination has the potential to completely erode small dormant investment pots, and carries the risk that confidence in auto-enrolment could be “fatally undermined”. The committee urges a review by 2020.

Dashboard needs more planning

By the end of this year, the committee says the government should have published a timetable for the rollout of a non-commercial pensions dashboard.

This should include key milestones, such as a deadline for pension providers to include their data on the dashboard, as well as plans and timescales for phases beyond the initial launch, including the provision of value for money comparisons.

The pensions dashboard should also feature retirement income targets to ensure the information is meaningful to its users. 

Net pay scandal continues

The inquiry found that in 2019-20, those with earnings below the personal allowance and contributing at statutory auto-enrolment rates will see a difference of around £65 per year between net pay and relief at source tax relief arrangements. The report said: “Over a lifetime of pension saving… this will be a significant proportion of their pension savings built up through automatic enrolment."

The government says that it would cost too much to put this right. In doing so, it risks damaging faith in the system, by perpetuating arrangements that cause individuals to lose noticeable sums through decisions they did not make.

The committee was also concerned that there was no agreed definition of 'value for money’ and urged the FCA not to postpone its review of independent governance committees.

Finally, despite the high prevalence of frauds, the inquiry found that FCA only had 10 dedicated staff to fight scams.

The report was welcomed by transparency campaigner Andy Agathangelou, who said that while costs are not the only determinant of value for money, understanding fees is crucial to a properly functioning saving system.

"Without an effective costs disclosure regime it is needlessly difficult for pension savers, and the trustees and employers that represent their interests, to know what costs are being applied,” the Transparency Task Force founder said.

“They are therefore being prevented from being able to make informed decisions in the same way that people shopping in a supermarket would not be able to make informed decisions if the price tags of the goods on sale were all covered up.

“On that basis, we wholeheartedly welcome today’s first class analysis and report by the Work and Pensions Committee.”