The Office of Fair Trading (OFT) has published a progress update on its study into the defined contribution (DC) pensions market.
It has collected and reviewed evidence on the sector, and will next explore certain issues that have arisen during the evidence review so far.
On the basis of the work it has performed to date, OFT has some concerns about the way that certain parts of the sector function and the implications that this could be having for savers.
These include:
- The current level of governance over the performance of some schemes may not be sufficient to ensure that scheme members are getting the best possible investment outcomes.
- A number of schemes have been set up with two-tier charging structures, where those members who have stopped making contributions pay a higher annual management charge percentage.
- There are a number of schemes open for auto-enrolment that appear to have built-in adviser commissions and which may not represent the best value for money for those that could be enrolled into them.
- There may be a number of schemes that do not have a realistic prospect of reaching sufficient scale to generate value for their members.
- The way that different providers currently present their charges may mean that they are not easily comparable.
- There may be some schemes, primarily but not exclusively those sold prior to 2001, that have charges that may not represent the best value for money, or that may not reflect current standards of scheme design.
The OFT will hold discussions throughout July about these concerns with the industry, the government and regulators.
The purpose of these discussions will be to discuss the scope and scale of its concerns, and to consider what action, if any, might be appropriate to address them.
Gregg McClymont, Labour’s shadow pension’s minister, said: “The OFT investigation called for by Labour is focusing on the right issues.
“This should be a signal to the government to back down and accept Labour’s amendments to the Pensions Bill.
“Given the OFT focus on the lack of clarity about what pension schemes charge people, it is shocking that the government opposes Labour’s amendment to the Pensions Bill, which would have given the government power to require full disclosure of costs and charges.
“Labour’s proposals would give the government power to prevent rip-offs and ensure everyone could save into a pension scheme they could trust. Without our amendments the Bill is only half a reform.”
Joanne Segars, chief executive at the National Association of Pension Funds (NAPF), added: “People must be able to trust their pension.
“Suspicion about fees and charges could undermine much-needed reforms to automatically bring all workers into a pension. It is pointless to put people into a pension that eats their savings away through high or opaque charges.
“The industry needs to be as transparent as possible so that people understand what they are being charged and why. The situation has got better, but we could do a lot more to improve the way we communicate with savers.
“The OFT has made the right diagnosis with its concerns about governance and scale. A big part of the problem is that there are too many small pension schemes. While some small schemes are well run, too many struggle to deliver good value for money. Bigger schemes are more likely to offer strong governance and keep costs down through economies of scale.
“We need to see a radical reshaping of the pension market to create a smaller number of much larger pension schemes.”
