24th September 2013
The UK pension industry is being encouraged to audit its charges and structure of old pension contracts following an Office of Fair Trading report which said around 10 per cent of the defined contribution pension market is not offering value.
The report was accompanied by the usual headlines about the rip off pension industry, but it was not all unremittingly bad news.
Around 90 per cent of UK defined contribution pension schemes were deemed to have passed muster in terms of the value they were providing and the charges they were levying though there are still arguments raging about a price cap.
That leaves a difficult remaining 10 per cent of old contracts generally dating back before 2001. Roughly these contracts predate Government’s stakeholder pension reforms which brought down costs dramatically across the pension market. The old contracts may be charging more than a quarter more on average – with some outliers charging more – than more recently set up schemes. As we said, it is not all bad news. Charges have, mostly, continued to fall. The OFT says the contracts it is concerned about involve about £30bn of pension investors’ money and may include around 1.4m investors – certainly not an insignificant number.
The OFT is also worried about very small schemes that do not have fully professional trustees, where it says there is also a risk these schemes will not provide value for money. They amount to about £10bn invested.
The OFT is a very powerful organisation within the UK investment landscape. It has ordered an audit of old schemes and the insurers’ trade body the Association of British Insurers has agreed.
It is also encouraging another regulator – known by the self explanatory title of the Pension Regulator which oversees company schemes – to review smaller trust-based schemes to see if they are providing value for money. No doubt things will change in the medium term, but it might be too slow for you, if you are worried about where your money is currently invested.
At the crux of the issue, is the fact that pensions are by their very nature long term contracts. Generally when they are reformed or market pressures come to bear, it means prices come down, but old schemes can still be in force on less generous terms. This will, of course erode the value of your pension over time. Now all pensions have to charge though reading some coverage in the national papers you might not believe so. But where older pensions are significantly out of line, the Government and various regulatory bodies want this cleared up before millions are brought into the big auto-enrolment reforms. There are definitely determined to avoid a situation where the new members may be opted into an existing but old fashioned contract with higher charges. But while the wheels of Government and the regulators turn, what should you do now?
But what can you do if you are an employer worried that the scheme you offer is not good value or if you are an employee worried about where your company pension is invested, its charges and what pension you will eventually get back?
Mindful Money asked two experts, Jamie Jenkins the head of workplace strategy at pension firm Standard Life, and a financial adviser, chartered financial planner Robert Reid, whose business Syndaxi, advises both individuals and employers. Their advice is actually remarkably similar.
Jamie Jenkins, head of workplace strategy at Standard Life, says: “If you are reading a headline in a tabloid about rip off pensions, as an employee or an employer, make sure you ask the right questions. If you an employee you should ask your employer. If you are an employer, ask your adviser or your provider – how does our scheme stack up?”
Indeed, Jenkins says his firm has been receiving inquiries from employers already. Standard Life is to take part in the audit, but Jenkins says the firm repriced its older pension contracts on to simple cleaner and lower charges some 12 or 13 years ago, so he is reasonably confident about the process.
He says, in general today, the market is competitive so if your employer is setting up a new scheme to meet the new workplace pension requirements, charges should be within a reasonably low range. The OFT, by and large, seems to agree.
But if the scheme is older, it is certainly worth checking if you are in an old higher charge scheme.
“If you are in a new scheme, today they are generally very competitive. There are a lot of options including Nest – [a scheme set up by the Government which has to accept the business even if other employers do not]. If your scheme is established already, it would be reasonable to explore whether the charges are competitive in today terms, is the investment default strategy up to scratch and how close it is to meeting the expected quality standards”.
Jenkins adds: “I wouldn’t expect employers or employees to know the answers, but asking the right questions can certainly help.”
Chartered financial planner Robert Reid suggests asking where you invested pound is going.
He says: “If there is an adviser involved in the scheme, ask them to tell you for every pound I put in, what happens. How much goes into the investment and how much disappears to pay for other things. Then, for every £10,000, I have accumulated in the pension, ask what happens to that?
Talking to employers in particular, he says that when an adviser has set up or is setting up a workplace pension scheme, it might be advisable to seek a second opinion an increasingly common practice.
His firm will charge for this, at around £1,500 to £2,00o. “If we get the right information, we put it into a format the employer can read easily, so they can make a value judgment.”
Finally Reid says an employer can concentrate their pension adviser’s mind by saying to them, whatever advice I get from you, I will also be sharing with my employees too.