Red tape is leaving thousands of pension scheme savers invested in low-returning investments, according to Lane Clark & Peacock (LCP).
The consultancy has called on the government to take a more transparent approach to explaining its rules in part of research on the issue released yesterday (17 August).
LCP said savers who make active investment choices - and are therefore not protected by annual default fund charge cap for members of workplace schemes covered by auto-enrolment rules - could be at risk of having savings trapped in a low return environment.
With many workplace members having actively chosen to invest some or all of their pension pot in property funds, LCP has said search for higher return will see them now stuck in ‘gated' funds as the coronavirus pandemic continues to negatively impact the economy.
LCP partner and head of defined contribution Laura Myers said better government clarification around rules is vital to ensure member protection.
"Where members have actively chosen to invest in property, they have been willing to face higher charges in the hope of securing better returns. It would be perverse if this was now regarded as a default arrangement and, further, in breach of the charge cap," she said. "It would be even more perverse if the result was that member funds continue to be invested in an overly cautious way, which is likely to produce a lower pension pot at retirement.
"The Pensions Regulator's guidance on this does not go far enough and leaves the issue open to legal interpretation and unfortunately worse outcomes for members. We urgently need clarity from government and the regulator so that members do not lose out'.
The difficulty in valuing property assets in the current crisis has led to the temporary suspension of many property funds since March, including those run by major fund houses including Legal & General, Janus Henderson, Aviva, Aberdeen Standard Investments, and Columbia Threadneedle.
New contributions are being diverted in response, according to LCP, into generally low-risk, low-return cash investments as a short-term measure meaning there is a risk that money may continue to flow into these low-return funds even once the Covid-19 crisis has abated.
"The issue is that when property funds re-open, the schemes will have to make a decision about what to do with future contributions if the member expresses no active preference," LCP said.
Property funds often have much higher charges due to the costs associated with the investment and could likely be in breach of the 0.75% charge cap.
"If the scheme decides that the member ‘would have wanted' the money to go into the property fund, and they start to redirect new contributions into property, there is a legal risk that this could also be treated as a ‘default fund' - as this now becomes another fund into which new contributions are directed without further action by the member," LCP continued.
"To avoid this risk, it is understood that some schemes are considering simply leaving member money going into low-risk, but low-return cash funds for the long-term, leaving it to members to make their own decisions.
"This could seriously damage the long-term prospects of savers, especially younger members who have a long time to retirement."
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