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Pension products are complex. The OFT has found that 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.
To improve this market, the OFT has secured agreement to important steps in tackling these problems:
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 National Association of Pension Funds (NAPF) gave an initial welcome to the OFT’s final report on the DC pensions landscape but argued that it should have gone further to ensure good outcomes for pension savers.
Joanne Segars, Chief Executive, NAPF, said:
“This report is very much needed and we agree with a lot of the analysis. The NAPF has been leading the way on promoting transparency in charging so we welcome the report’s recommendation for action. We support its proposals to tackle legacy issues such as high charges but want to be assured that the proposed audit of legacy contract-based schemes will be properly independent. We welcome the recommendation that small trust-based schemes are subject to scrutiny by the Regulator to ensure they offer value for money, as all pension schemes should be providing value for money, although we wish the OFT had gone further and recommended consolidation and the creation of super trusts.
“We are particularly concerned that the report risks letting down pension savers who need someone solely on their side, with the independence and power to act in their interests, to make sure they get the best outcomes for their retirement savings. We would have preferred a clear direction that employers have a choice – they should either be prepared to provide governance themselves or use a master trust arrangement. The proposal to have governance as part of the provider risks fudging the issue and leading to potential conflicts of interest.
“The report has set the future course with the right long term principles to secure good outcomes for pension savers. But we feel that action is urgently needed now. With automatic enrolment underway we need to get things right now, not further down the line.”
In conclusion, Ms Segars said: “As always, the devil is in the detail. We now need a period of consultation on the OFT’s recommendations and a clear plan from the Government as to how it would implement them".
NAPF's initial response © NAPF - National Association of Pensions Funds
‘Charges at lowest ever level’ - ABI responds to OFT report into workplace pensions
Otto Thoresen, the ABI’s Director General, said: "The schemes principally identified by the OFT as potentially having charges not representing good value for money account for around 10 per cent of the nearly £300 billion assets managed by the industry, including closed schemes and schemes that will not be used for automatic enrolment. But we agree with the OFT that it is important to review charges to ensure they represent good value for money for today’s employers and savers. Pension providers have agreed to an audit of all legacy and higher charging schemes to ensure any problems can be sorted out.
"We also agree with the OFT that with millions of new savers being auto-enrolled into work place saving it is important that schemes are governed in a way that ensures good value for money for employees. The industry has discussed this in detail with the OFT and will set up independent governance panels to make sure this commitment is met.