The Office of Fair Trading has recommended banning pension schemes with “built in” adviser commissions or active member discounts being used for automatic enrolment.
The OFT’s study into the workplace defined contribution pension market, published this morning, sets out concerns over the £30bn of savings held in old, high charging schemes and the £10bn currently sitting in small trust-based schemes.
The body says 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 tackle its problems.
Firstly, to address the OFT’s concerns about old and high charging contract and bundled-trust schemes, the Association of British Insurers and its members have agreed to 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 getting value for money.
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.
On Monday, 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 the charges, including whether providers could disclose a single annual management charge and investment transaction costs.
The report did not recommend a cap on charges, 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: “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.”
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 its 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.
“David Cameron’s failure to act shows how out of touch he and his Government are and they must urgently rethink their rejection of those amendments.”
ABI director general Otto Thoreson says: “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 £300bn 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.”