Crackdown on poor value workplace pensions

20th September 2013

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The Office of Fair Trading (OFT) is clamping down on poor value workplace pension schemes which are seeing millions of savers getting lacklustre returns on their nest-eggs writes Philip Scott.

The OFT has reached agreement with businesses and The Pensions Regulator on a set of reforms to the £275bn market for so-called defined contribution (DC) workplace pensions after its market study, published this week found problems which mean some savers are not receiving value for money.

Around five million people are saving into DC pension schemes and this is expected to soar by up to nine million savers over the next five years, following the Government’s introduction of auto-enrolment last October.

The OFT has found employers, which have the responsibility of deciding which pension scheme to choose for their employees, may often lack the capability or the incentive to assess value for money. This problem has the potential to grow during auto-enrolment as smaller employers, with limited resources, are required to provide schemes for their employees.

This contributes to the difficulty of making the right choices about pensions, for individual savers and employers. The OFT has found these weaknesses have already created a risk of savers losing out in two parts of the market.

It discovered that old and high charging contract and bundled-trust schemes, containing around £30bn of savings, may not be delivering value for money. Second, smaller trust-based schemes, containing around £10bn of savings, are at risk of delivering poor value for money due to low levels of trustee engagement and capability.

In addition, the OFT is concerned that similar problems might occur in the future without measures to improve the scrutiny of pension schemes on behalf of savers.

Clive Maxwell, OFT chief executive, says: “We have found problems in relying on competition to drive value for money for savers in this market. We have therefore worked closely with the Government, regulators and industry to agree a set of measures that we believe are an important step in helping to ensure that savers get better outcomes.

“It is important, particularly given that automatic enrolment is already under way, that these measures are implemented rapidly. Whether people are starting pension-saving for the first time through automatic enrolment, or have already been saving for years, it is vital that they are saving in schemes which deliver good value for money.”

The Pensions Regulator has now agreed to take action to assess which smaller trust based schemes are not delivering value for money while the Department for Work and Pensions has agreed to consider whether the Regulator needs new enforcement powers to tackle the problem.

To address the OFT’s concerns about old and high charging contract and bundled trust schemes, the trade body, the Association of British Insurers and its members have agreed to an immediate audit of these schemes which will be overseen by an independent project board.

To bolster the scrutiny of pension schemes on behalf of employees, the ABI has also agreed that its members will establish independent governance committees. Committees should recommend changes to providers and escalate issues to regulators where they see risks of poor outcomes for savers.

In addition, the OFT is recommending the DWP consults on improving the transparency and comparability of information about the cost and quality of schemes in order to make employers’ initial choice of scheme easier.

It is also recommending that the DWP consults on preventing schemes being used for auto-enrolment that contain in-built adviser commissions, or that penalise members with higher charges when they stop contributing into their pensions.

Some older schemes set up before 2001 have annual management charges as high as 2.3%.

Tom McPhail, head of pensions research, at financial adviser Hargreaves Lansdown adds: “The OFT have released their report into DC pensions today. This was very much as expected. However the governance measures proposed are weak and the missing link is getting people engaged with their pension savings.

“No one looks after your money as well as you do and the fundamental problem with the governance of workplace pensions is that someone else (your employer) is choosing your pension for you. Some employers do a good job but inevitably not all do. In the long run where we need to get to is to use the efficiencies of setting up group pensions through the workplace and then put individuals in control of their own retirement savings.”

Otto Thoresen, the ABI’s Director General, commenting on the review says: “The pensions industry is reforming and changing. It is determined to build greater trust from consumers and employers so auto-enrolment can achieve its potential. We will continue to work with Government and other stakeholders in ensuring that pension reform is a success. The OFT report has been an important contribution to achieving that goal.”

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