The Independent Project Board (IPB), which includes representatives of the ABI, FCA, DWP and the TPR, has today released the final report of a review into charges and benefits in legacy defined contribution workplace pension schemes. The Board confirms that £25.8 billion of savers’ assets are trapped in schemes with high charges but does not let the public, savers or employers know which schemes these are or propose concrete action to remedy the situation.
The IPB has given its findings to pension providers and asked their governance bodies (trustee boards or Independent Governance Committees) to agree ‘remedial actions and an implementation plan with their provider by end December 2015 at the latest’. But Independent Governance Committees (IGCs) will only come into existence in April 2015 and their effectiveness is not yet proven. ShareAction is calling for responsibility to remedy the situation to rest with the boards of the insurance companies, rather than IGCs which are essentially advisory bodies.
Today’s report recommends that the DWP and the FCA conduct another review by the end of 2016 to see if the industry has made any progress.
The IPB was set up to conduct the review after a 2013 report into the workplace pensions market by the now defunct Office of Fair
Trading identified £30 billion of pension savers money in potentially poor value schemes.
Despite the damning findings of the OFT the insurance industry escaped referral for a Market Investigation Reference by the Competition Commission, although it met the legal test, by agreeing to conduct this review of legacy schemes. ShareAction has been concerned from the start that the review lacked transparency.
The report released today confirms the OFT’s findings on incomprehensible and rip-off charges for UK pension savers.
The report stresses that value for money is ‘highly dependent on the characteristics and behaviour of individual savers’ and recommends that ‘savers may wish to transfer to better value schemes’. It is not realistic to expect savers to know which scheme is best for them when the review identified 38 different types of charges and 291 different charging structures. Even if savers could compare schemes and make the right choice, exit fees are prohibitive: £3.4 billion of savers’ assets are locked in schemes with potential exit charges of 10%.
The review also finds that the smallest pension pots (less than £10,000) were most at risk of exposure to the highest level of charges (3% per annum). This shows that it may be the most vulnerable savers who are being failed by the insurance industry and the regulators.
The ABI reports today that charges are at their ‘lowest ever levels’ and emphasises that high charges are mainly in schemes set up pre-2001. But buried in the final report is news that over 400,000 savers have joined schemes with high charges in the last 3 years alone.
Also, the report’s headline figures on charges are misleading as the ‘reduction in yield’ metric used does not include any charges relating to investment transaction costs, which can also be substantial.
Catherine Howarth, CEO of ShareAction said:
‘Today’s report is shocking in terms of the scale of rip-off fees uncovered and the weakness of the action proposed in response.
‘The scandal-hit FCA urgently needs to prove that it can take decisive action to protect consumers from the worst excesses of a financial services industry which has been ripping them off for decades.
‘This review should have published the names of providers and schemes found to be ripping people off. Yet again savers have been left in the dark about what’s happening to their retirement savings.
‘The government needs to set out clearly the steps pension providers need to take and what will happen to them if they fail to clean up their act.
‘Judging by the timing of this report’s publication, the Association of British Insurers is clearly hoping for a whitewash Christmas.”
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