A big bang in pensions?

Ensuring low and middle income savers are not left picking up the pieces

25 July 2022

By Ben Franklin and Norma Cohen

2 minute read

A new report compares savers' priorities with government plans to deregulate pensions to drive investment for recovery

Our latest report explores the issues that workplace pension holders prioritise, informed by polling. We find that the public overwhelmingly prioritises the return on their savings, above ethical considerations and above investing in companies or assets that would benefit their local area.

This is at odds with the approach set out by Prime Minister Boris Johnson and then-Chancellor Rishi Sunak, who last year published a letter calling for an “investment big bang” in pension investment in UK assets akin to Canada and Australia, intending to “unlock hundreds of billions of pounds…to drive the UK’s recovery”.

Crucially, we found that over half of savers prioritise the fees they are charged on their pension savings. The government has been consulting on changes to the regulatory charge cap, set by the Financial Conduct Authority in 2015 to protect new savers from high fees and charges. By looking at increasing the cap, the government’s intention is to help pension funds invest in new assets including infrastructure, since funds holding illiquid assets often have performance fees.

But increasing the cap means the potential for higher costs for millions of low- and middle-income savers, which over many years can result in significantly lower returns. CPP calculates that a UK worker paying fees at the current cap of 0.75% will see the size of their total savings pot cut by around 16.5% as a result of fees over a 40-year period. If the cap were to increase further to 1.2 percent of assets, this would reduce pension pots by a quarter.

The government has for now paused on its proposal to exclude performance fees from the charge cap, but there remains a persistent drive to deregulate in this area to meet wider economic and political goals. While there is undoubtedly great potential for investment in local infrastructure to bring benefits to local economies, this needs to be carefully balanced with the need to protect the retirement savings of millions of pension-holders by keeping charges and fees low over the long term.