The Office of Fair Trading (OFT) has published its report on the defined contribution (DC) workplace pensions market.
The report, which was launched in January 2013 to investigate whether the workplace DC pension market was working well for employees, concluded that there are problems with the market that may prevent some savers from getting value for money.
It has also found that employers, which have the responsibility to decide which pension scheme to choose for their employees, may often lack the capability or the incentive to assess value for money. The OFT said this problem has the potential to grow during auto-enrolment as smaller employers, with limited resources, are required to provide schemes for their employees.
The OFT has proposed five key recommendations, with agreement from the industry and The Pensions Regulator (TPR), to tackle these problems:
- Dealing with old and/or high charging schemes. To address the OFT’s concerns about old and high charging contract and bundled-trust schemes, the Association of British Insurers and its members have agreed to an immediate audit of these schemes, aimed at ensuring savers are getting value for money. This will be overseen by an independent project board.
- Dealing with issues with small trust-based schemes. To address the OFT’s concerns about small contract-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 TPR needs new enforcement powers to tackle the problem.
- Improving governance. To address the OFT’s concerns about lack of independent scrutiny of contract-based schemes, 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. It recommends that the key elements of this governance solution should be embedded by the government in a minimum governance standard that will apply to all pension schemes.
- Improving the quality of information available on costs and charges. The OFT recommends DWP consult on improving the transparency and comparability of information about the charges, including whether providers could disclose a single annual management charge and investment transaction costs, and quality of schemes in order to make employers’ initial choice of scheme easier.
- Preventing future risks of detriment. The OFT recommends DWP consult 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.
Clive Maxwell (pictured), chief executive at the OFT, said: “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 that 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.”