The Office of Fair Trading (OFT) has launched a market study of defined contribution (DC) workplace pension schemes.
The study aims to examine whether schemes are set up to provide the best value for money for employees.
It will look at:
- How pension providers compete and how the market develops.
- Whether there is enough pressure on providers to keep pension charges low and whether savers are given enough information on charges.
- Whether smaller firms face difficulties in making pension decisions and if they receive appropriate help when setting up a workplace pension scheme.
- The barriers to switching between schemes.
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The OFT is working with the Department for Work and Pensions, The Pensions Regulator and the Financial Services Authority. It will also consult with providers, employers and employees. It plans to complete the study by August 2013.
Mary Starks, senior director in the OFT’s services, infrastructure and public markets group, said: “The UK workplace pensions market is set for rapid growth and change over the next six years, in particular with the introduction of automatic enrolment. It is important that these savers get a good deal.
“We want to take a look at the market now to ensure that providers are competing to offer the best possible deals, and that the choices made by employers mean that employees are saving into good pension schemes for their retirement.”
The OFT study is a useful initiative and part of a growing focus questioning whether pensions can offer more value to savers. Charges and annuities are a particular concern, and we hope the OFT sheds some light on these issues, which can make a huge difference to a pensioner’s income. The market is changing and charges have fallen over the years, but there is still further to go to ensure people get the best possible value from a pension.
The NAPF has been leading the way, helping employers better understand costs and charges in these pensions. But other questions remain to be answered, including those about the structure of the UK pensions industry.
Small employers are vital to the success of auto-enrolment, but they also struggle to understand and access good pensions. It is helpful that the OFT is going to look at this group. Workers need to know that they are getting the best deal, whether they are working for a small or large company.
There are about 205,000 DC schemes in the private sector and there is currently a very real danger that smaller employers will use these older schemes for auto-enrolment, potentially bringing millions of new pension investors into poor value default funds. We hope that the OFT study will help employers select an appropriate scheme for their employers, which will enable employees to save a pension pot which provides adequately for their retirement.
My initial thoughts are that the quadripartite system of scheme oversight, involving DWP, HMT, FSA and TPR is not functioning well and needs to be rethought. The OFT’s investigation may provide a catalyst for such a review, which I believe would be a good thing.
We know that pension charges have come down significantly in recent years and that new workplace pensions are generally offering good value for money. The principal problems exist with legacy schemes and smaller trust based arrangements.
I’m also concerned that the OFT investigation may focus only on price, without looking at important aspects of pensions such as quality of administration, stability and crucially, member engagement. Without good member engagement it is unrealistic to expect good outcomes from DC pensions; any investigation which looks only at price without considering whether the services provided actually deliver good outcomes will only be looking at half the equation.
We welcome this initiative by the Office of Fair Trading. It should sit well alongside similar work from the DWP on pension charges, The Pensions Regulator’s work around access to advice, the ABI’s on disclosure of charges and the NAPF’s on improving pension member outcomes.
Workplace pensions often haven’t provided good value for employees or employers, who have been faced with high charges, a lack of flexibility and difficulties in accessing the right financial and corporate advice.
There has been important progress on pension charges since the introduction of stakeholder pensions in 2001 and more recently with the arrival of new lower cost providers, such as Nest and Now: Pensions, but there is still more that needs to be done.
A huge problem, particularly for smaller employers, is a lack of independent financial advice which means that existing arrangements might not be reviewed objectively, the most appropriate new options might not be recommended and a lack of ongoing service means that employees are likely to be less engaged.
For the workplace pension market to work effectively we need to see lower charges, greater flexibility and good quality ongoing advice and information for both employers and employees. We need the work of the Office of Fair Trading, together with the DWP, The Pensions Regulator, ABI and NAPF, to help us achieve this.
With the start of auto-enrolment we are embarking on a project which is vitally important to the future wellbeing of millions of people in this country.
Its success or otherwise may depend on the value and quality of the results that it achieves. We should therefore welcome the OFT enquiry and look upon it as an opportunity to establish whether the best results are in fact being achieved.
Issues such as value for money, good communication practices and consumer engagement with pensions and the industry that provides them will be substantial matters which the OFT will want to critically examine.