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OFT finds pensions get poor value for money
23 September 2013
Many members losing out on investment management
Office of Fair Trading
A major investigation of the UK's £275bn ($441bn) defined contribution (DC) pension sector by the Office of Fair Trading (OFT) has found many savers receive poor value for money.
With the number of people saving in a DC scheme in the UK set to nearly double from 5 to 9 million as a result of the introduction of auto-enrolment, the OFT found there was a risk of many employers – many of which lack the capability or incentive to choose a value for money pension plan – losing out.
Clive Maxwell, OFT chief executive, said: “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.”
The OFT found that members of older contract and bundled-trust schemes were being hit by high charges, while members of small trust-based schemes risked poor outcomes via low engagement and capability among their trustees.
The OFT, The Pensions Regulator and pensions industry have agreed on reforms.
The Regulator has agreed to assess small trust-based, with the possibility of new enforcement powers from the government to tackle the problem, while the Association of British Insurers (ABI) has agreed to an independently overseen audit of older contract and bundled trust schemes to assess value for money on charges and has agreed to establish independent governance committees.
The OFT also recommended the Department for Work and Pensions consult on improving the transparency and comparability of scheme charges and bar schemes from being used for auto-enrolment if they include in-built adviser commissions or 'active member discounts' that result in higher charges for people who stop contributing.
Gregg McClymont MP, Labour’s shadow pensions minister, said that while there were positive steps in the OFT's report, there was still some way to go: “Ending pensions rip offs is a key part of tackling the cost of living crisis. Decisions on costs and charges cannot be left to trade associations whose members have a potential interest in not declaring all charges.”
Gina Miller, co-founder of investment manager SCM Private and an outspoken critic of investment management charges, said:
“The OFT rightly concludes that competition cannot be relied upon to drive value for money and we have no confidence at all that the industry will deliver value and transparency without regulatory intervention to force change and safeguard consumer rights.
“The system is broken, and while the OFT’s recommendations are a partial fix they are not the full solution.”