Out-Law News 3 min. read

Experts welcome OFT's workplace pension reforms, but low contributions remain the real challenge

Low contributions remain the "real obstacle" to the success of the Government's workplace pension scheme reforms following the Office of Fair Trading's (OFT's) review of the defined contribution (DC) pensions market, an expert has said.

However, Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that asking employers or employees to increase their contributions was "too much of a hot potato" in the current economic climate.

"A pension scheme may have the best governance and the lowest charges, but the resulting pension will still be disappointing if insufficient contributions are paid in," he said. "The aim of auto-enrolment is to ensure that more workers have a decent income on retirement, and fewer fall back on state benefits. If auto-enrolment is to succeed, those pensions have to be adequate."

Tyler was commenting as the OFT, which is the UK's consumer protection watchdog, announced that it had agreed a set of reforms to DC workplace pensions with businesses and the Pensions Regulator, following its study of the £275 billion market for this type of pension.

In its final report, published today, the OFT concluded that some savers were not getting value for money from this type of scheme due to complexities and problems in the market. It has made a number of recommendations for further action to be taken by the regulators and the Department of Work and Pensions (DWP) in order to improve existing schemes, and to prevent consumer detriment in the future.

The report found that savers on older, high charging contract and bundled-trust schemes were already losing out, while low levels of trustee engagement and capability were disadvantaging those on smaller trust-based schemes. The annual management charge (AMC) on pre-2001 legacy schemes was on average 26% higher than on newer schemes, according to the OFT's research; while these schemes were also more likely to have additional charges. More generally, better scrutiny of pension schemes was needed to prevent similar problems emerging elsewhere in the market, it said.

The Pensions Regulator has agreed to take "rapid action" to assess which smaller trust-based schemes are not delivering value for money, and could be granted new enforcement powers in order to do so effectively. The Association of British Insurers (ABI) and its member firms have agreed to carry out an immediate audit of schemes with an AMC above 1%, to be overseen by an independent project board, and will establish independent pension scheme governance committees which will scrutinise schemes on behalf of employees.

In addition to these immediate actions, the OFT has recommended that the Government consults on improving the transparency and comparability of information about scheme quality and costs to assist employers in their initial choice of pension scheme. It should also consider preventing schemes that contain in-built adviser commissions or that offer active member discounts (AMDs) which penalise those who have stopped contributing to their pension, the OFT said.

The OFT has provisionally decided that although there were sufficient competition problems in the DC pensions market to make a reference to the Competition Commission appropriate, it would not do so at this stage as there were "steps in place to address the competition concerns" identified. It is consulting on this provisional decision until the end of October.

"The OFT has focussed on two obstacles in the road to adequate pensions. First, employers may not know what they are doing when they choose a pension scheme for their workers. Second, pension schemes are so complex that value for money is hard to assess. The OFT has proposed a number of strategies designed to overcome those obstacles which are welcome, although there is little detail so far and much to consult on," Tyler said.

Tom Barton of Pinsent Masons pointed out that reducing scheme charges along would not necessarily make pension schemes better value for money.

"Cheap, basic and uniform will probably make things easier to understand; and will also help to facilitate automatic transfer in due course," he said. "But in the interests of delivering good outcomes, employers and trustees should ideally have the opportunity to design something better than a 'bog standard' scheme, even if there is a cost attached."

"The OFT's findings reinforce the need for trustees to take DC more seriously. Trustees have long-standing legal duties to look after members' interests - and need to think very carefully about what this means where the investment risk falls on the member. Trustees should already be seeking value for money in order to discharge their duties to members," he said.

Up to nine million people will begin saving more towards their retirement or saving for the first time under the Government's automatic enrolment programme, which began for the largest employers in October last year. The vast majority of those savers will be enrolled into DC schemes, under which the benefits provided on retirement depend on the performance of the saver's investment. Around five million people in the UK are currently saving into one of these schemes, according to OFT estimates.

Pensions Minister Steve Webb said that the report outlined "further important ways to help consumers" following the Government's recent ban on consultancy charges in auto-enrolment schemes. The Government would "act on" the OFT's recommendations, he said.

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