High pension charges could cut income

Auto-enrolling employees into older-style pension schemes with high charges could lose up to 50% of their retirement income, according to research by the Pensions Institute at Cass Business School.

The research, Caveat venditor: the brave new world of auto-enrolment should be governed by the principle of seller not buyer beware, examined default funds in defined contribution (DC) pension schemes.

Academics at the Pensions Institute said an estimated 90-97% of employees will be auto-enrolled into default funds, and found that employees could be blindly enrolled into older schemes with charges up to six times higher than newer pension schemes. For example, the average annual management charge (AMC) for existing schemes is around 3%, whereas newer multi-employer pension schemes charge around 0.5%.

The research stated that this could be a particular problem for employees of smaller organisations because the administration involved in setting up a new pension scheme could lead many employers to use their existing schemes instead.

It also warned that advice on pension schemes for smaller employers is lacking because of the introduction of the retail distribution review (RDR), which will ban commission fees paid to advisers on schemes introduced after 1 January 2013.

Professor David Blake, director at the Pensions Institute, said: “Fortunately, there is time to address the problem of old high-charging funds, which for historic reasons are still widely used in the smaller employer markets.

“These employers are not required to introduce auto-enrolment immediately, but many organisations will need to be prepared by mid to late 2013.”

The research, which was sponsored by Now: Pensions, made several recommendations to tackle this issue, including the introduction of a kite-mark code for DC schemes to help employers choose schemes that offer good value, and that the principle of caveat venditor (let the seller beware) should apply to all schemes, as the buyer (the employee) is actually passively auto-enrolled into the scheme by the employer, rather than having a choice in which scheme is used.