Kevin LeGrand, Head of Pensions Policy at Buck Consultants, comments on today’s report from the Office of Fair Trading (OFT):
“Buck welcomes the findings of today’s OFT report. Automatic enrolment is an important step in addressing the retirement needs of UK citizens, recognising that the state cannot afford to make provision itself. However, to make the system work effectively, it is essential that the money invested generates decent returns.
“In the case of smaller companies, which have yet to reach their staging dates, the OFT have rightly identified that the responsibility of selecting a scheme lies with the employer whose focus, in some cases, may not exactly align with those of individual members. Without access to good advice, such employers may not be in a position to make a suitable assessment of the quality and appropriateness of the schemes on offer.
“With the abolition of commission from the funds invested in the scheme, as a means of payment for that advice, employers will find themselves faced with having to pay fees which many will be unwilling or unable to do. Therefore, much of the regulatory focus is on making sure that any pension scheme product available in the market is of a minimum standard. Today’s OFT report builds on this focus on value for the member.
“This is a reasonable approach and will help to address the “advice vacuum”. For smaller employers, this will help to reduce the amount of management time and cost that an employer or trustees will have to expend at the scheme level.
Other key issues:
• Measuring “value”. Contrary to extensive speculation, the OFT has not recommended a single charge cap. Instead it will rely upon individual guidance committees to look at their products or schemes, and make value assessments. Whilst this is helpful in trying to avoid a “one size fits all but helps none” situation, driving all schemes down to a low minimum, it will nevertheless present a challenge to those committees to assess exactly what is “good value”.
• The issue of scale. The report continues the attack upon “small” schemes, that has been mounted by other government and regulatory organisations. This will lead to fewer schemes, tending towards industry-wide and multiple-employer schemes. Whilst this may lead to more efficiencies in some cases, it will also dilute the bond between the employer and its employees in respect of this important part of employee remuneration and its use as a recruitment and retention tool. Automatic enrolment minimum contribution levels are inadequate on their own to meet employee retirement income needs and expectations, and the support of the employer through the direct employer/employee workplace relationship is a vital tool in encouraging greater employee engagement.
• Multiple governance levels. This report and its recommendations naturally arise from the OFT’s remit to assess value for money for the consumer. There are of course many other aspects to the good running of a pension scheme. Those other areas will continue to be addressed in other forums. The recommendations for governance committees specifically to look at value for money, if established separately, will add an additional level of governance (and cost) to the running of schemes; it is important that these recommendations are incorporated into the other governance structures.”
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