Weaknesses in the system mean some savers are not getting value for money when it comes to their pensions, says the Office for Fair Trading (OFT). (Release)
The OFT published a market study today and, in agreement with The Pensions Regulator (TPR) has agreed a set of reforms to the £275bn market for defined contribution (DC) workplace pensions which, it says, are not being effectively driven down by competition.
About five million people use DC pensions to save and, with the government's introduction of auto-enrolment last autumn, the expectation is that this will increase to up to nine million over the next five years.
In its report, the OFT highlighted problems it found: -
- The complexity of pensions makes it harder for individual savers and employers to make informed decisions
- Employees can 'lack the capability or the incentive to assess value for money.'
- Auto-enrolment may cause more problems for smaller businesses who, 'with limited resources, are required to provide schemes for their employees.'
- The potential for similar problems to occur in the future 'without measures to improve the scrutiny of pension schemes on behalf of savers.'
Chief executive of OFT, Clive Maxwell, comments on the thinking behind the investiagtion:
We have found problems in relying on competition to drive value for money for savers in this market.
We've 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.
The OFT has called on the government to act over practices it thinks will lead to savers losing out, recommending that the Department for Work and Pensions and Pensions to consult on improving transparency and comparability of information on the costs and quality of schemes and on the prevention of schemes that build-in commissions or penalise members when they stop contributing.
To improve this market, the OFT has secured agreement from TPR:
• to address the OFT's concerns about small trust-based schemes, TPR has agreed to take rapid action to assess which smaller trust based schemes are not delivering value for money. The Department for Work and Pensions (DWP) has agreed to consider whether the TPR 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 Association of British Insurers (ABI) and its members have agreed to an immediate audit of these schemes. The audit will give a full understanding of the charges and any benefits associated with these schemes and ensure savers are getting value for money. This will be overseen by an independent project board.
• to strengthen the scrutiny of pension schemes on behalf of employees, the ABI has 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 response to the study, the Investment Management Association (IMA), said:
Given the relative weakness of consumers and employers in this market, it is right to ensure alignment of interests in the governance process. At the same time, although alignment is necessary, it is not a sufficient condition for ensuring that DC schemes are of good quality and meet the expectations of scheme members. The IMA believes that additional mechanisms are needed to promote quality of governance, but does not accept that the legislative route is the best one to take in this respect.