UK – The UK’s Office of Fair Trading (OFT) has set out a series of reforms to the £275bn (€326bn) market for defined contribution (DC) workplace pensions, but stopped short of imposing a cap on charges.
Measures the watchdog has agreed with the government and industry include singling out poor-value schemes, improving transparency and bolstering governance, the OFT said, after publishing its long-awaited study on the DC pensions market.
Clive Maxwell, chief executive of the OFT, said: “Whether people are starting pension-saving for the first time through automatic enrolment or have already been saving for years, it is vital they save in schemes that deliver good value for money.”
The automatic enrolment regime, which took effect last year, had the potential to expand and change the market for pensions in the UK for the better, he said.
But because the office has found problems in relying on competition to drive value for money for savers in this market, it has now agreed on action to help savers get better outcomes, he said.
“It is important, particularly given that automatic enrolment is already underway, that these measures be implemented rapidly,” he added.
The OFT said pension products were complex, and that this made it hard for both individual savers and employers to make the right choices about pensions.
On top of this, employers – responsible for deciding which pension scheme to choose for employees – often lack the capability or the incentive to assess value for money.
“This problem has the potential to grow during auto-enrolment, as smaller employers, with limited resources, are required to provide schemes for their employees,” the OFT said.
These weaknesses have already created a risk of savers losing out in two parts of the market, it said.
It said old and high-charging contract and bundled-trust schemes, which contain around £30bn of savings, may not be delivering value for money.
Additionally, smaller trust-based schemes – containing about £10bn of savings – are at risk of delivering poor value because of low levels of trustee engagement and capability.
The OFT also said it was concerned about similar problems happening in the future if nothing is done to improve the scrutiny of pensions on behalf of savers.
Specific steps agreed by the OFT include an undertaking by the Pensions Regulator (TPR) to act quickly to assess which smaller trust-based schemes are not delivering value for money.
In connection with this, the OFT said the Department for Work & Pensions (DWP) agreed to consider whether the TPR needed new enforcement powers to tackle this problem.
The office also agreed with the Association of British Insurers (ABI) and its members to carry out an immediate audit of old, high-charging contract and bundled trust schemes.
The audit – to be overseen by an independent project board – is to give a full understanding of charges and benefits, the OFT said.
The ABI has also agreed to set up independent governance committees to strengthen scrutiny of pension schemes for employees, which should recommend changes to providers and communicate with regulators where savers risk poor outcomes, the OFT said.
It is also recommending the DWP consults on making schemes more transparent and easier to compare in terms of cost and quality, as well as on barring schemes from auto-enrolment where they contain in-built adviser commissions or higher charges for non-contributing scheme members.
The OFT said it had, at least for now, decided not to refer the market to the Competition Commission, but added that it was now consulting on this provisional decision.
It said it had considered whether a charge cap would be effective for legacy schemes, but saw the audit process as a better solution.
A charge cap might threaten value-for-money benefits such as guaranteed annuities, it said, but added that such a cap would be hard to define in any case, given that legacy schemes used as many as 18 different names and configurations for charges.
Also, it said, charge caps could have unintended consequences.
“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,” the OFT said.
It also said in the report that, in future, it expected the market to take greater advantage of the economies of scale available for administration and investment.
“But policies could help accelerate this process and remove barriers to scale while avoiding concentration,” it added.
Andrew Warwick Thompson, TPR’s executive director of DC governance, said the regulator would issue guidance to trustees next month to help them assess the value for money of their scheme.
The National Association of Pension Funds (NAPF) said the OFT report should have gone further.
Joanne Segars, NAPF chief executive, said: “We welcome the recommendation that small trust-based schemes are subject to scrutiny by the Pensions Regulator to ensure they offer value for money, as all pension schemes should be providing value for money, although we wish the OFT had gone further and recommended consolidation and the creation of super trusts.”
The association would have preferred a clear direction from the OFT that employers have a choice that they should either provide governance themselves or use a master trust arrangement, she said.
“The proposal to have governance as part of the provider risks fudging the issue and leading to potential conflicts of interest,” Segars said.
Zoe Lynch, partner at pensions law firm Sackers, said even though the OFT had not recommended a charge cap, the issue was far from closed.
“We understand the DWP had been waiting for the OFT’s recommendation before taking action on charges, so I imagine we can now expect a consultation on charges in schemes being used for automatic enrolment imminently,” she said.