The Office of Fair Trading (OFT) has reached agreement with both business and The pensions Regulator (TPR) on reforms for the defined contribution pension market.
This comes after an OFT study, published today, that found problems, which result in some savers not getting value for money.
Around five million people are saving into DC pension schemes. This is expected to increase by up to nine million savers over the next five years, following the Government's introduction of auto-enrolment last October says the OFT.
This affects those on defined contribution schemes (where the amount put into the pot is defined but the pension received depends on the effect of market fluctuations on the money saved) as opposed to the defined benefit schemes (or final salary – where the pension received at the end is defined and is not dependent on the amount contributed).
The problems are brought about by the complexity of these pensions says the OFT, which makes choosing the right scheme difficult for both employer and employee. And it goes on to say that this has the potential to get worse under auto enrolment.
The OFT has found these weaknesses have already created a risk of savers losing out in two parts of the market. First, old and high charging contract and bundled-trust schemes, containing around £30 billion of savings, may not be delivering value for money. Second, smaller trust-based schemes, containing around £10 billion 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.
To improve this market, the OFT has secured agreement to important steps in tackling these problems:
• 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 addition, the OFT has identified a number of practices that it thinks will lead to savers losing out without action by the Government. As a result, it 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
• 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.
'Automatic enrolment has the potential to expand and change the market for pensions in the UK for the better. 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.
'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.'
Mark Pemberthy , Director, JLT Employee Benefits, comments:
"As DC becomes the dominant form of workplace pension in the UK we agree that quality benchmarks are important in delivering good outcomes for members as well as reassurance for scheme sponsors, particularly smaller employers who do not have ready access to advice. This is another step forward in rebuilding the consumer's trust in pensions."
"We are encouraged that the OFT recognise that charges are not the only measure of value for money and that scheme quality is equally important. We also welcome the acknowledgment of the importance of the decumulation phase of DC even though this was out of scope of this report."
"The OFT study is an intelligent, well-structured report and the conclusions echo elements of JLT's recently released white paper 'Achieving the 21st century pensions settlement' which introduced the concept of 'Active Intervention' powers for governance bodies in contract-based arrangements and 'tariff checks' for pension scheme providers to inform members when they might save money by moving their pension savings."
Roger Mattingly, President of the Society of Pension Consultants ("SPC"), said:
"Equally as important as the OFT's report itself is the Pension Minister, Steve Webb's, pledge to act on the recommendations in short order.
"Whilst assessing what constitutes good value can be largely subjective and extremely complicated whatever the size of the scheme, it is nevertheless true that some employers – particularly at the smaller end – lack the necessary in-house expertise to determine the value being provided by their pension pot. This problem certainly needs addressing as a matter of urgency, as auto enrolment heralds millions of individuals entering schemes, some of which will not be fit for purpose. One solution would be the creation of more and larger pooled pension funds which combine the assets of many smaller schemes to create pots of significant scale which are then managed on an effective and efficient basis."