The Department for Work and Pensions (DWP) is proposing 'radical reforms' to pension charges, capping fees at 0.75%.
A consultation has now been launched by the DWP following a speech by Pensions minister Steve Webb on Tuesday, confirming that charges on auto-enrolment pension schemes will be given an upper limit to ensure employees are getting fair deal.
The DWP says it wants to "help people save for the future". The Office of Fair Trading (OFT) estimates the average charge on new pension schemes is currently 0.51%, meaning around 186,000 pension pots are being charged more than 1%.
"These differences can equate to considerable amounts of money", says the DWP. It says an individual saving £100 per month for 46 years could stand to lose almost £170,000 from their pension pot if they pay a 1% charge, and more than £230,000 if that charge is 1.5%.
Originally a cap of 1% had been proposed, but speaking in the House of Commons on Tuesday, Webb said he was opting for a "tougher option".
Peter McDonald, pensions partner at PriceWaterhouseCooper, says many larger schemes should able to charge less than the maximum "due to economies of scale", and that "competition should also help drive down charges".
However, there is concern that some providers will use the new proposals as an excuse to increase their charges, bringing them in line with the maximum.
Will Aitken, senior consultant at Towers Watson, says: "A charge cap only looks at what people are paying and not what they are getting for their money. No one should take too much comfort from the fact that their scheme is within this cap; 0.75% is still above the odds for a basic product."
McDonald agrees that the test will be in what savers get for their money from their pension scheme. "Good investment management, member communication and education are just as important to ensure people are getting the most value from their pensions," he says.
Meanwhile, the Trade Union Congress (TUC) has welcomed the plans, saying it is a "good initial step" and should "provide reassurance that savers not being ripped off".
The TUC adds that hidden charges now need to be avoided, and that in the longer term in would like to see the cap reduced to 0.5%.
This article was written for our sister website Money Observer