Around five million people are currently saving into Defined Contribution (DC) pension schemes. This figure is expected to increase by up to nine million savers over the next five years, following the Government’s introduction of auto enrolment in October 2012.
In view of the significant increase in the number of people who will use an employers DC pension scheme to save for their retirement, the Office of Fair Trading (OFT) reviewed these types of pension arrangement to establish whether they provide value for money and good outcomes for the scheme members.
The OFT report was issued in September and a summary of their key conclusions are provided below.
Overall, the OFT found that competition alone cannot be relied upon to deliver value for money for all savers in the DC workplace pension market. This arises from the combination of two factors:
- The complexity of the product which makes it difficult for individuals and employers to make the right choices about pensions
- Employers, who 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.
The OFT found these weaknesses have already created a risk of savers losing out in two key areas of the market being:
Old and/or high charging schemes
Around £30 billion of savings in old and/or high charging plans may not provide value for money
Small trust based schemes
Around £10 billion of savings in smaller trust-based pension schemes are at risk of delivering poor value for money due to low levels of engagement and/or a lack of capability by the trustees.
The OFT is concerned that similar problems might occur in the future without measures to improve the governance and scrutiny of pension schemes on behalf of savers and the quality of information available.
The OFT have secured agreement with the pensions industry and the Pensions Regulator to take some important steps in tackling these problems:
Dealing with old and/or high charging schemes
To address the OFT’s concerns about old and high charging pension schemes, the Association of British Insurers (ABI) 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 trust based schemes, the Pensions Regulator (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 lack of independent scrutiny of contract based schemes, the ABI has agreed that their 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. The OFT recommend 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 scheme charges and the quality of schemes to help make employers decisions on the right scheme for them and their employees 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.
It is clear the Workplace Pension landscape continues to evolve and therefore now may be an appropriate time to review your existing pension arrangements to ensure that they adhere to the OFT’s recommendations.
Wingate Benefits Solutions have extensive knowledge of the Workplace Pension maze and are here to assist you in planning and implementing the new reforms and structuring your pension benefit to meet the Pension Regulators guidelines.
Should you wish to discuss the above in more detail or any other aspect of your current or soon to be established pension scheme please, do not hesitate to contact your usual Wingate Benefit Solutions adviser or call us on 0844 406 0027.
Tax and legislation are liable to change. This information is based on WBS’s current understanding of UK law and HM Revenue & Customs practice and legislation we believe may apply in the future. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of the information contained herewith. It is recommended that professional advice is sought prior to entering into any financial arrangement.