The OFT has reached agreement with businesses and The Pensions Regulator (TPR) on a set of reforms to the £275 billion market for defined contribution (DC) workplace pensions after its market study (which can be found here), published today, found problems which mean some savers do not get 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.
Pension products are complex. This contributes to the difficulty of making the right choices about pensions, for individual savers and employers. In addition, the OFT has found employers, which 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. 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 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.
Clive Maxwell, OFT Chief Executive, 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 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.'
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