The value of the defined contribution (DC) pensions market is expected to grow to £1.7 trillion by 2030 from £276 billion assets under management pre-auto-enrolment in 2012, according to a report by the Pensions Institute.
But its Assessing value for money in defined contribution default funds report found that members of DC schemes are losing thousands of pounds due to the way DC default investment funds are priced and sold.
It also found there was no link between the cost of membership and member outcomes, with higher charges not linked to potential outperformance of a pension scheme.
According to the Pensions Institute, providers are cherry-picking only profitable sections of a workforce, which scuppers many smaller employers’ plans to use an existing scheme provider for auto-enrolment.
The report made a number of recommendations that included:
- Defining member value for money, to deliver scheme cost and design, sustainable over both the accumulation and decumulation periods.
- Defining the members’ target outcome.
- To require all costs and charges to be reported in full.
- A revision to DC contract law.
- A reform to regulation that requires a clear and consistent legal and regulatory regime across both contract and trust-based schemes.
Dr Debbie Harrison (pictured), visiting professor at the Pensions Institute at Cass Business School, said: “The stakes are high and the battle to secure market share between now and 2018 is going to be bloody.
“The government and regulators must ensure that in a market where competition is weak, due to the lack of expertise of smaller employers, that the schemes that emerge as victors do so because they offer genuine member value for money.
“Otherwise there is a danger that deep pockets, predatory pricing and conflicts of interest might become the hallmark of the dominant auto-enrolment schemes.”
Chris Daykin, trustee director at Now: Pensions, added: “If the report’s recommendations are followed, scheme members can have greater confidence that their pension will deliver a lifetime income in retirement that is fair value relative to the contributions paid.
“The consequences of ignoring these warnings will be many disappointed pensioners and an ageing population which simply cannot afford to retire.”