The U.K. government will launch its command paper Friday setting out details of how it will cap charges on default pension plans, said Steve Webb, minister for pensions.
“It was suggested to us that there is a lot going on next April,” said Mr. Webb, addressing delegates at the National Association of Pension Funds’ annual conference, held in Liverpool, England, referring to changes to the way defined contribution participants will be able to access their retirement savings starting in April 2015. “So maybe that charge cap thing (when charges on DC plans will be capped at 0.75%), you should put it back again.”
“So momentarily, I'm switching to Margaret Thatcher mode: no, no, no.”
Mr. Webb said the charge cap will come in April next year, and “gone will be the days when a government thought a government-approved product could charge 1.5% for 10 years.”
He said the government will also, starting next April, “be throwing the light into the murky corners of the industry,” with plans to discover the effects of transaction costs on members’ plans.
“Transaction costs are, for me, the murky secret in the cupboard of the industry. Because trustees don’t know, by and large, what’s happening to their members’ money and what is being sliced and diced,” he said.
“This document asks (trustees) to find out where money is going out of a pension fund.”
He said the government had wanted to include something on transaction costs in the 2015 charge cap requirement, but “realized we don’t have a clue.”
Mr. Webb also addressed the fact that, starting next April, DC participants will no longer be required to purchase an annuity. “What about those locked into an annuity, (who) may feel bitter? It is something that is just gnawing away in the back of my mind.”
He said that, if he remains pensions minister after next year’s election, he “would like to enable the unwinding of those annuities. That is just Steve Webb, not the government view, so it may never happen.”
Mr. Webb’s final point was that the current 8% mandatory contribution to DC plans is not enough. But he said the success of voluntary automatic enrollment makes the case for compulsory automatic enrollment weaker. Currently 90% of those auto-enrolled are remaining in the plan voluntarily.
He suggested instead that default escalation may be the answer. “Go in, and unless you opt out, with each pay rise a bit of that goes into your pension.”