The UK’s largest long-term savings provider is pressing the government for changes that would lead to millions of young people paying more for their pensions.
Under existing rules, over 10mn workers who have been automatically enrolled into workplace pension plans cannot be charged more than 0.75 per cent in annual management fees on their retirement investments. Savers pay the same rate regardless of age.
But Phoenix, which has £300bn of assets under management, says a higher cap may be more “appropriate” for younger savers.
“We believe that some members who are towards the start of their retirement journey are likely to be in a position to take more investment risk than those who are much closer to retirement age, if it suits their risk profile,” Mike Eakins, chief investment officer of the Phoenix Group, told the Financial Times.
Phoenix did not specify its preferred level for a young savers’ cap, but its proposal — submitted to a government consultation — would involve younger savers investing in so-called illiquid assets, such as infrastructure, private equity and venture capital, which are more expensive because of performance fees and management costs. Fees would be reduced as savers age and are switched to cheaper and less risky assets, such as bonds or cash, in a process known as ‘lifestyling’.
“Those (young) members might benefit from charges being lifestyled so that they can be invested in a wider array of asset classes than what might typically be available for them to invest in, which have the potential for higher investment returns,” added Eakins.
Phoenix’s proposal chimes with a government push to unlock billions of pounds in pension fund cash for investment to help bounce back from the pandemic and “level up”. The Department for Work and Pensions is currently consulting on reforms to the pensions charge cap to encourage wider investment in illiquid assets, where performance fees are typically levied.
Alongside a more flexible charge cap, Phoenix says reform of performance fees is needed, such as a clawback of these charges in years when returns are poor.
The DWP said: “The government is carefully reviewing all consultation responses and will respond formally in due course.”
Consumer campaigners have highlighted that differences in charges can lead to big differences in the amounts of pension cash accumulated over time.
For example, a 22-year-old paying charges of 1 per cent over a 46-year period would pay around £80,000 more when compared with a fee of 0.5 per cent, all things being equal with investment returns, according to analysis by the Pensions Policy Institute (PPI).
Mick McAteer, co-director of the Financial Inclusion Centre think-tank and a former board member of the Financial Conduct Authority, called the Phoenix proposal a “very bad idea”.
“The fact that higher charges would be applied to the pensions savings of younger people means that the detrimental impact of those high charges would be compounded over a longer time,” said McAteer.
“So, even more value would be extracted meaning they would have to put more aside to offset the impact of those higher charges.”
Steve Webb, a former pensions minister, said the government “should be wary of any special pleading” to justify exceptions to the charge cap.
“In particular, telling younger savers that they are being charged more for their pensions than their older counterparts sends a terrible signal to a generation who we are always telling should be saving more,” said Webb, now a partner with LCP, the actuarial consultants. “I hope that the government will stand firm on this issue.”