Pension fees cap too high, says Legal and General

Image caption Legal and General says that the cap on charges for managing pensions should be set at the low end of the scale

Leading pensions provider Legal and General says the government's planned 0.75% cap on management fees is too high.

The company says that, at that level, customers would pay more than £4bn too much over a lifetime of pension saving.

The criticism comes on the same day as the deadline for submissions by the pensions industry to the government.

Legal and General appears to be out of line with the rest of the industry, who are against any cap on fees.

Typically, pension funds levy an annual management charge in exchange for investing pension savers' money. This comes out of the pension pot that they have accrued.

But other, more obscure fees are often charged as well, so that savers are not always aware of how much they are paying.

Ministers believe the industry could be charging excessive amounts and want to curb the practice.

The government has talked of a "full frontal assault" on fees levied by pension providers, with some older schemes charging more than 2%.

Most leading groups believe a cap is not desirable as it will be hard to implement.

But, by contrast, Legal and General not only wants a cap, but says the government's one is too generous and 0.5% would be better.

Independent pensions expert Ros Altmann told the BBC's Today programme that pension fees should not be capped too low.

"We don't want to dumb down pensions to the lowest common denominator," she said.

She added that a low price cap would make it harder for pension companies to provide innovative strategies.

Excess fees

Since last October, workers have been gradually signed up to workplace pensions, such as the government-funded National Employment Savings Trust (Nest) scheme, unless they deliberately opt out.

With this auto-enrolment now in place, millions more employees will be brought into company pension schemes over the next few years.

The government's consultation process has been seeking industry input on three possible options - a 1% cap, a 0.75% cap, or a two-tier "comply or explain" cap, where pension providers will be capped at 0.75%, rising to 1% if they can explain to regulators why their scheme must charge more.

Legal and General says the difference between 0.5% and 0.75% would mean more than £4bn of excess fees during a lifetime of saving by those customers.

The government said that someone who initially saved £1,200 in the first year and worked for 46 years could lose almost £170,000 from their pension pot with a 1% charge and more than £230,000 with a 1.5% charge.

These calculations assume that their contributions rise by 4% each year, and that the pension pot investment grows by 7% each year.

In addition, these figures do not take inflation into account. In 46 years' time, the total amount will be worth less in real terms owing to the effects of inflation.

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