The Government’s plans to cap fees paid by savers in pension schemes could end up costing the insurance industry £1 billion, the boss of giant mutual Royal London warned today.
Chief executive Phil Loney attacked the overhaul, spearheaded by pensions minister Steve Webb, as a “back door tax” and a “headline-grabbing policy” that will ultimately lead to fees being heaped on employers rather than individuals.
He said this could end up hitting contributions made by companies.
From April, the Government plans to cap the annual charge for managing an automatically-enrolled pension pot at 0.75% of the funds being managed, in what Webb has described as a “full frontal assault” on pension fees.
The pensions minister estimated the industry’s revenues would be reduced by £200 million over 10 years, but Loney said the actual sum could be five times this.
“The provisions for the pension charge cap that we have seen from pension providers during this reporting period suggests that this is a gross underestimate,” Loney warned.
“This seems to me to be an unacceptable margin for error in the Government’s understanding of the impact of its actions and the size of the impact is driving many insurers to introduce employer fee arrangements to mitigate against the impact of further reductions in the price cap.”
Tom McPhail, head of pension research at Hargreaves Lansdown, agreed with Loney and said insurance companies are “making provisions to cover the cost of the price cap which dwarf the Department for Work and Pensions’s original estimates.
“The DWP’s analysis was branded as not fit for purpose and we’re now seeing the consequence of that. Our fear is that employers will end up picking up the bill for this.”
The industry also faces separate reforms that will give savers more freedom with pension pots from next year, so they will not have to buy an annuity when they retire.
Loney’s comments came as Royal London, which sponsors England one-day cricket, saw pre-tax profits halve to £136 million with a £61 million write-down on future profits it expects to lose due to the cap. On an operating level, profits rose 8% to £110 million.
