Insurers are under pressure to reduce inflated charges on £25billion of pensions after a government report found over a third of older workers are paying too much for a pension.

 

The Independent Project Board, set up by the Office of Fair Trading last year to audit the pension companies' books, examined £67.5billion of workplace (non final salary) pension funds which were set up before 2001, the year when a 1 per cent charge cap was set.

It found that between £23.2bn and £25.8bn of savers' funds are exposed to charges of more than 1 per cent.

Around half the cash is potentially exposed to charges above 1.5 per cent, up to £8.bn could pay above 2per cent, and almost £1bn may end up with a levy of 3 per cent or more.

Worst hit are savers who built up a pension pot worth under £10,000 in a workplace, then stopped paying into it after leaving.

"For such savers the impact of monthly fees can result in a very high impact of charges", the report warns.

The IPB also found that an estimated 407,000 savers who have joined schemes in the last three years could end up paying charges of more than 1 per cent, including 178,000 liable for over 2 per cent and 22,000 for over 3 per cent.

In a warning to savers with an eye on cashing in their pension, the report says funds worth around £3.4bn can impose an exit charge of 10 per cent on anyone cashing in, and a quarter of the total is held by people who will be over 55 next April when the barrier is lifted.

The IPB is asking companies to " conduct a review of any actions already taken to reduce charges or other qualitative factors that might justify high charges", by 30 June 2015, and to "identify what actions could be taken to improve outcomes for savers and what actions can be taken to stop new savers joining poor value schemes".

It has also recommended that the Department for Work and Pensions and the Financial Conduct Authority should jointly review industry-wide progress in remedying poor value schemes and publish a report - by the end of 2016.

Tom McPhail, head of pensions research at Hargreaves Lansdown,commented: "Whilst the audit committee didn't have the power to force the pension providers to put their house in order, it is clear that if they don't do it of their own free will today, they may be forced to tomorrow. Long-standing loyal investors shouldn't be penalised by getting a worse deal than new customers."

Jamie Jenkins, head of pensions strategy, said: "Standard Life re-priced its customers' pension plans back in 2001/2002, reducing charges to a single annual percentage of funds of less than 1per cent. For the overwhelming majority of our pension customers, charges are already very competitive by today's standards." He added that because the report deals in percentages, many of the apparently extreme examples around smaller pots might in reality amount to "a few pennies on a few pounds".

Carol Sergeant, chair of the IPB, said: "The challenge now is for providers and governance bodies to work together under the watchful eyes of the regulators and bring about the necessary changes so that savers who are not in automatic enrolment schemes can benefit from modern standards and value for money outcomes."

Huw Evans, deputy director general at the Association of British Insurers, said: "The Independent Project Board is right to recognise that no single charging structure provides the best value for all customers in all circumstances. How much people save and for how long can have an important impact on charge levels, and investment performance and quality of scheme governance also matter."

But he said the report would "help providers do more to identify and tackle those workers who could be impacted by higher charges and ensure the right outcomes for them".