Forget the free market when it comes to pensions
Caps on prices goes against the free market ethos of the financial services sector but the government's decision to do just that for workplace pensions is a long overdue move.
In May, pensions minister Steve Webb said the Department for Work and Pensions would enforce an immediate ban all consultancy charges and consult on capping default fund charges on auto-enrolment workplace pensions.
The hope is that it will increase confidence in pensions at a time when the government is pushing UK workers into workplace schemes through its auto-enrolment initiative. There's no point in placing someone into a pension if they're just going to opt out of it because it's a rip off and the sad truth is that many employee pension schemes are a rip off.
Consultancy charges are the biggest villain in the world of pensions. They cover the cost of a pension consultant setting up and overseeing a member's pension and astonishingly a survey by consumer group Which? earlier this year showed that 50% of a member's first year or pension contributions can be eaten up by these costs.
What compounds the concern is that pension members cannot opt out of paying these consultancy charges and have no say in who the consultant is on their pension or how much they charge. And to add insult to all this financial injury, the consultants aren't regulated and don't even need specific qualifications to do their job. No wonder so many people think pensions are a con.
The second element of capping charges applies to the default fund that people get placed into if they fail to make an investment decision for their pension savings. These funds can often be expensive because so many people fail to invest their money and end up in the default, it's an easy way for pension providers to make some cash.
Normally I'm all for a free market and to a certain extent believe in the rules of caveat emptor but when it comes to pensions I think the government is completely right to intervene.
Pensions are complicated and few people understand what they should be getting for their money. People should not then have that ignorance exploited by greedy consultants and pension providers just because they are doing the right thing and trying to make provision for their old age.
By setting some strict cost guidelines let's hope that fewer people are scared off by pensions and their concerns about being ripped off are alleviated.