A damning Office of Fair Trading report into workplace pensions has laid bare serious concerns about charges and governance but stopped short of pushing for a cap on fees for auto-enrolment.
The OFT’s study into the workplace defined contribution pension market, published last week, identifies the £30bn of savings held in old, high-charging schemes and the £10bn currently sitting in small trust-based schemes as areas which need to be addressed.
The body said it could have referred the industry to the Competition Commission but chose not to after the Government, The Pensions Regulator and the industry agreed on a number of measures to deal with the problems.
First, the Association of British Insurers and its members will undertake an immediate audit of schemes with an AMC of more than 1 per cent.
The aim of the audit, which will be overseen by an independent project board, is to ensure savers are not being ripped off by providers.
In addition, the ABI’s members have agreed to establish independent governance committees to address concerns about a lack of independent scrutiny in contract-based pension schemes.
The ABI says these committees will be set up in mid-2014 with the aim of overseeing value for money in workplace schemes.
The OFT says The Pensions Regulator will take “rapid action” to assess which smaller trust based schemes are not delivering value for money. The Department for Work and Pensions will also consider whether TPR needs new enforcement powers to tackle the problem.
The OFT has also asked the DWP to 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.
This came after Money Marketing reported the Government could target pre-RDR commission after pensions minister Steve Webb confirmed the ban on consultancy charging may be applied retrospectively.
Finally, the OFT wants the DWP to consult on improving the transparency and comparability of information about charges, including whether providers could disclose a single annual management charge and investment transaction costs.
The report did not recommend a cap on charges, however, citing concerns that such a cap could hit members with valuable guarantees and result in unintended consequences.
The report says: “Charge caps can create a risk of unintended consequences. Set too high, a cap can become a target for providers. Set too low, a cap can create incentives for providers to lower quality and/or impose less visible charges elsewhere.
“While we would not rule out a charge cap, it should be considered in full knowledge of the different charges and benefits that apply in the market and of the risks that a cap might entail.”
OFT chief executive Clive Maxwell says: “We have found problems in relying on competition to drive value for money for savers in this market. We have 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 savers get better outcomes.
“It is important, particularly given automatic enrolment is already under way, that these measures are implemented rapidly.”
Pensions minister Steve Webb says: “This report outlines further important ways to help consumers, and we will act on its recommendations.
“In particular, we need to ensure those already in pension schemes are getting good value for money and will be actively involved in the audit of pension schemes sold prior to 2001. We will consult shortly on minimum scheme standards, including further action on charges.”
Labour shadow pensions minister Gregg McClymont says: “The Government must act on the OFT’s recommendations. Labour has already tabled amendments to the Pensions Bill which would allow reforms of the market on costs and charges, governance and scale to make sure pensions are good value.”
See pages 10 and 11 for more coverage of the OFT’s report into workplace pensions