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.”