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Govt could force employers to regularly review auto-enrol schemes

The Government may legislate to require employers to review their pension scheme periodically due to fears about a lack of competitiveness following the introduction of auto-enrolment.

A senior Department for Work and Pensions source says the Government is “nervous” about competition in the pensions market once employers have chosen their auto-enrolment schemes. 

The source says: “Once an employer has gone through all the hassle of getting a relationship with a provider and the scheme has been branded and integrated then why would they want to go through the grief of frictional costs of changing, which are huge?

“Unless the pensions industry can persuade us there will be real market dynamism then somebody will need to regulate to protect consumers as costs will just drift up.

“I understand it is evolving and firms are still building capacity but this is a market where 99 per cent of people do not change their provider. It could lead to a series of monopolistic providers.

“Employers will not bother to shop around so unless we say that at a future date employees have the right to ask their employer to re-evaluate their provider, or some real stick to stoke it up, then it may need to be regulated.”

In January, pensions minister Steve Webb warned of the risk of “loss-leading” providers selling schemes at artificially low prices to win auto-enrolment business and then recouping costs by hiking charges in the future.

In a report published this morning, the Office of Fair Trading says while the average AMC on new contract-based schemes has fallen from 0.79 per cent in 2001 to 0.51 per cent in 2012, many scheme members are not benefiting from this due to a lack of switching.

The report also warns the buyer-side of the workplace DC market is “one of the weakest the OFT has analysed in recent years”.

Aegon regulatory strategy director Steven Cameron says: “Once auto-enrolment is in place the big focus should be on engaging the members, because if you do that then you will increase the competitive forces in the market.

“But I would not support interventionist legislation imposed upon employers and I do not think employers would support that either.”

Corporate Benefits Consulting director Allan Maxwell says: “Once we get to the end of 2018 there will be lots of mature pension schemes in terms of contribution levels.

“The providers, who at this point will be struggling to attract new business, will go after that market aggressively. I think there is very little chance of providers increasing costs in the medium term.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Given that auto-enrolment is a seen as a government of state regulated arrangement (and the inability of Joe-Public to discriminate between the auto enrolment requirements and NEST), I think it is up to OffAE to police this space, maybe? Andrew Warwick-Thompson suggested last week that TPR would be looking at rating schemes based on levels of charges against investment options and tools available to members and quality of member information etc.

    Maybe it would have been easir to make auto-enrolment complusory-enrolment, with contributions collected through the NI system we already have in place, syphoned out of the back door (after collection) into individual pots within NEST, invested in the default fund (but with the ability of members to go in and actively select an alternative investment option if they preferred). Then the Government or DWP or TPR would only have one provider to regulate the charges (and service levels) of? It would also have avoided all the costs for employers in selecting a scheme and communicating auto-enrolment and the cost of payroll/HR systems changes etc, and the arguments about consultants’ costs being charged to members’ accounts!

  2. At L&G we already have independent governance of both our master trust and GPP/Stakeholder schemes and support the OFT’s proposed extension of independent governance.

  3. This highlights the importance for employers use using an auto enrolment compliance engine that sits independently of the pension scheme itself, rather than one of the free ‘middleware’ offerings that some providers are putting forward. Otherwise, in the event of wanting/having to move scheme provider later, it would be tricky indeed to have to unpick all of the data/records from the old compliance engine and to start over again.

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