- The Government should not become obsessed about lowering pensions charges too far and too quickly, a former Downing Street adviser says.

Ros Altmann – a pensions adviser to Tony Blair during his premiership – says the difference between an annual management charge of 0.5% and an AMC of 0.75% equates to about 5% of a final pension fund over 46 years.

She says people lose far more than this when buying poor annuities, which have no controls at all.

Altmann says new scheme charges should be capped to protect smaller firms but legacy schemes should be left until after 2018. She also says charges for the Government’s default automatic enrolment scheme, National Employment Savings Trust, should be reformed to allow for proper comparisons. Altmann was responding to the Department for Work and Pensions’ consultation on pension fund charges which closes today (28 November).

She says: “There is significant focus on how low fees need to be to offer good value. Of course, there is no 'right' answer to the question of what is a fair fee level. The days of rip-off charging for newly established schemes are gone - charges have already fallen dramatically, which is good news.

“I believe it is important, however, not to become too obsessed with charges on the accumulation phase of pensions as there is a danger of dumbing down investment approaches by trying to lower fee levels too far, too fast. “I also believe that the current obsession with charges is missing a much more important issue, which is that there are no controls at all on the fees charged, or value for money offered, at the other end of the pension system when people can buy poor annuities, which are the wrong product at a bad value rate and pay high fees to do so.†She continues: “I recommend that the DWP should introduce controls on charges for new schemes urgently, as small employers will not be able to negotiate such good rates for their workers and a cap of 0.75% seems reasonable. We should not be obsessed with charging levels - a 0.75% charge is not a 'rip-off', and driving charges down to just 0.5% is probably too low to allow for innovation in investment approaches for default funds. Just forcing everyone into a passive tracker fund or an inflexible lifestyling approach is not necessarily an optimal investment strategy. Firms have to make enough money for it to be worthwhile innovating.â€

And she adds: “In any charge cap change, I believe the Government should address the problem of NEST's high initial charge. Currently, NEST takes 1.8% of each contribution made plus an additional 0.3% of the contribution value each year. For older workers being automatically enrolled into NEST, this amounts to a very high fee level - far greater than any proposed cap.

"Not only will this be bad value for workers who do not contribute to NEST for many years (for example for those who are close to retirement when they start contributing), but having a two-tier charge structure makes is much more difficult to compare charges across different schemes.

"It would be much easier for employers and workers to understand the impact of charges on their auto-enrolment pension funds if there was just a single charge, reported in a standard format, which could be compared across all schemes. A flat-rate charge of, say, 0.5% for NEST, would set a good benchmark for the industry."

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