The Office of Fair Trading (OFT) is cracking down on poor value defined contribution pension schemes ahead of a new wave of savers joining up via auto enrolment.
Some savers aren’t getting value for money with their defined contribution workplace pensions.
That's the findings of the Office of Fair Trading's review of pensions. It suggested the complexity of pension products made it hard for individuals and employers to make the right choices, and that employers often lacked the capability or incentive to assess value for money.
£30 billion of savings in old and expensive contract and bundled-trust schemes, as well as £10 billion of investment in smaller trust-based schemes, were identified as parts of the market where some savers were at risk of losing out because of these ‘weaknesses’.
With a defined contribution scheme you and/or your employer save money into a pension fund each year. That money is invested and hopefully will grow. When the time comes to retire you use whatever has accumulated in your pot to buy an annuity, which will provide an income for the rest of your life. The bigger the pot, the bigger the income.
This differs to how a defined benefit pension scheme works. With these you get an income based on a percentage of your earnings rather than your contributions and the performance of investments, which offers more certainty. However, these are much less common now.
In order to prevent defined contribution pension savers losing out now as well as in the future, when auto enrolment brings up to nine million new savers into defined contribution schemes, the OFT has issued a string of reforms and recommendations.
Reforms
The OFT has agreed a course of action with the industry and the Pensions Regulator (TPR).
The Association of British Insurers (ABI) and its members will launch an immediate audit of old and expensive contract and bundle-trust schemes, which will be overseen by an independent body. The benefits of these schemes will be assessed to ensure savers are getting value for money.
The Pensions Regulator (TPR) will also take rapid action to investigate which smaller trust-based schemes are not delivering value for savers. New enforcement powers could be granted to the TPR to tackle the problem.
Independent governance committees will also be established by ABI members to improve the scrutiny of contract-based schemes. These committees will be able to suggest changes to providers and forward issues to regulators if they fear a poor outcome for savers.
[SPOTLIGHT]As well as these three measures to help current savers, the OFT has also made recommendations to the Government to prevent future savers losing out.
It wants the Department for Work and Pensions (DWP) to improve transparency and the comparability of information when it comes to costs and charges. This will make it easier for individuals and employers to make decisions about schemes.
The OFT also wants the Government to prevent some schemes that come with built-in advisor commissions or that penalise members with higher charges if they stop contributing into their pensions from being used for auto enrolment .
Rapid response
It is estimated five million people are saving into a defined contribution scheme at the moment.
But the market, worth £275 billion, is going to see a wave of new savers in the next five years as a result of auto enrolment.
By 2018 up to nine million people will be placed into a defined contribution scheme.
With auto enrolment gathering speed, problems identified by the OFT will only get worse as small businesses, with limited resources, have to place their workers into pension schemes.
So it’s important that changes proposed by the OFT happen rapidly to stop even more savers from losing out.
Gaps in reforms
The reforms announced by the OFT don’t go as far as they could to deliver value for existing and future savers.
More decisive action needs to be taken on capping excessive charges that diminish the value of pension savings.
The OFT found that older schemes set up before 2001 have annual management charges that are 26% higher than those set up later on.
What do you think about the OFT’s reforms? Let us know in the comment box below.
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