It is coming up to the first anniversary of automatic enrolment and the workplace pensions market is really beginning to warm up. With staging dates rapidly approaching increasing numbers of employers are engaging with the auto-enrolment requirements.
The Office of Fair Trading will soon publish their report on the effectiveness of competition in the current workplace pension market.
The OFT study has been comprehensive and detailed and I am fully expecting their recommendations will include some market interventions that could have a profound impact on the market and the future outcomes of savers.
From all the activity that is currently in the market it seems to me that the process of pension reform didn’t end with the arrival of auto-enrolment last year. Auto-enrolment was the start of a much wider programme of reform.
This being the case, I thought I would feed some of our thinking on reform into the mix.
There has been a good deal of speculation around price capping and the DWP is still talking about a consultation on this very subject. We do not see the need for a price cap if the market for workplace pensions is allowed to work efficiently.
Competition in the market for workplace pensions has driven down administration and investment management costs and now the average “price” of a pension – represented by the annual management charge deducted from each member’s fund – is 0.57 per cent.
Work undertaken by Deloitte estimates that if the workplace pension market is reformed to function efficiently (i.e. with the current barriers to switching removed) this average charge could fall to as low as 0.38 per cent.
When prices are capped it reduces competition as the majority of market participants congregate just below the level of the price cap.
It is estimated that there is £30bn (or 25 per cent of the total) in workplace pensions that were set up prior to 2001, and before the introduction of stakeholder pensions.
While some of these old DC pensions may still be fit for purpose, charges on the schemes tend to be much higher than modern schemes. Often there are penalties levied if the scheme transfers which is why the money has remained in these schemes.
In their quality standards consultation the DWP floated the idea of a governance body with a duty to act in members’ interests. Undertaking regular reviews, the governance body should rule on whether charges are fair and represent value-for-money by today’s standards.
We believe that this initiative will be insufficient to the task because it is not in provider companies’ interests to consistently remove active member discounts, transfer charges and other impediments to switching. There needs to be a more radical intervention.
Alignment of interests
Royal London has been lobbying for a new employer duty to be written into the Pension Bill 2013; specifically the duty of employers to always act in the best interests of the members of the scheme.
We accept that this will not necessarily be a reform welcomed by employers themselves. However, we believe that advisers will play a vital role in the fulfilment of this new employer duty.
The draft Bill should also specify that where the best interests of members are unclear that employers should seek, and pay for, professional advice.
The FCA has a role to play too. They should be tasked with regulating the advice interface between adviser and employer and ensure that scheme members’ interests are always paramount. It may be necessary for the regulator to define acceptable methods of adviser remuneration.
For the avoidance of doubt, I am not calling for a return of consultancy charging – that is a debate that is now over and done. What we are calling for is a means of adviser remuneration that aligns the interests of employers and advisers in the pursuit of the best outcomes for scheme members.
Gareth Evans is head of corporate affairs at Royal London