63/13 19 September 2013
The OFT has reached agreement with business and The Pensions Regulator (TPR) on a set of reforms to the £275 billion market for defined contribution (DC) workplace pensions after its market study, published today, found problems which mean some savers do not get value for money.
Around five million people are saving into DC pension schemes. This is expected to increase by up to nine million savers over the next five years, following the Government's introduction of auto-enrolment last October.
Pension products are complex. This contributes to the difficulty of making the right choices about pensions, for individual savers and employers. In addition, the OFT has found employers, which have the responsibility of deciding which pension scheme to choose for their employees, may often lack the capability or the incentive to assess value for money. This problem has the potential to grow during auto-enrolment as smaller employers, with limited resources, are required to provide schemes for their employees.
The OFT has found these weaknesses have already created a risk of savers losing out in two parts of the market. First, old and high charging contract and bundled-trust schemes, containing around £30 billion of savings, may not be delivering value for money. Second, smaller trust-based schemes, containing around £10 billion of savings, are at risk of delivering poor value for money due to low levels of trustee engagement and capability.
In addition, the OFT is concerned that similar problems might occur in the future without measures to improve the scrutiny of pension schemes on behalf of savers.
To improve this market, the OFT has secured agreement to important steps in tackling these problems:
- to address the OFT's concerns about small trust-based schemes, TPR has agreed to take rapid action to assess which smaller trust based schemes are not delivering value for money. The Department for Work and Pensions (DWP) has agreed to consider whether the TPR needs new enforcement powers to tackle the problem
- to address the OFT's concerns about old and high charging contract and bundled trust schemes, the Association of British Insurers (ABI) and its members have agreed to an immediate audit of these schemes. The audit will give a full understanding of the charges and any benefits associated with these schemes and ensure savers are getting value for money. This will be overseen by an independent project board
- to strengthen the scrutiny of pension schemes on behalf of employees, the ABI has agreed that its members will establish independent governance committees. Committees should recommend changes to providers and escalate issues to regulators where they see risks of poor outcomes for savers.
In addition, the OFT has identified a number of practices that it thinks will lead to savers losing out without action by the Government. As a result, it is recommending:
- the DWP consults on improving the transparency and comparability of information about the cost and quality of schemes in order to make employers' initial choice of scheme easier
- the DWP consults on preventing schemes being used for auto-enrolment that contain in-built adviser commissions or that penalise members with higher charges when they stop contributing into their pensions.
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 market study report is available from the case page.
- In the light of the fact that there are steps in place to address the competition concerns identified, the OFT has provisionally concluded that a Market Investigation Reference would not be appropriate in this instance. It is consulting on this provisional decision and responses should be emailed to: email@example.com by 31 October 2013.
- Last October the Government introduced automatic enrolment, an important initiative that requires employers to pay into a workplace pension scheme for all staff unless they opt out. Automatic enrolment is being staged in over the next six years, beginning with larger employers last autumn, followed by medium sized then smaller employers. The DWP estimated that automatic enrolment will increase the number of individuals enrolled in DC workplace pension schemes by between six million to nine million people by 2018. For more information on auto-enrolment, see www.gov.uk/workplace-pensions/about-workplace-pensions.
- Defined contribution (DC) schemes are those in which the size of the pension pot accrued is linked to the contributions made by the individual in their working life, the costs of the scheme and the performance of the investments. The risks of the scheme fall to the employee and there is considerably less certainty about the income employees will receive in retirement. In contrast, defined benefit schemes promise the employee a certain income in retirement that is linked to their salary, years of service and the contributions made. Schemes may be linked to an individual's final salary or their average salary over their career. The scheme gives the individual greater certainty over their income in retirement, leaving the investment risks of the scheme with the employer.
- The OFT estimates that the annual management charge (AMC) - which is levied as a percentage of scheme members' accumulated savings every year - on pre-2001 legacy schemes is 26 per cent higher on average than schemes set up post 2001. Schemes sold before 2001 are more likely to have other charges in addition to an AMC. Pension providers have not supplied sufficient evidence to the OFT for it to understand the additional impact of these charges in the course of the market study.
- OFT market studies are carried out under section 5 of the Enterprise Act 2002 which allows the OFT to obtain information and conduct research. Effectively, they allow a market-wide consideration of both competition and consumer issues. They take an overview of regulatory and other economic drivers in the market and consumer and business behaviour. Possible outcomes of market studies include: enforcement action by the OFT, a Market Investigation Reference to the Competition Commission, recommendations for changes in laws and regulations, recommendations to regulators, self-regulatory bodies and others to consider changes to their rules, recommendations for campaigns to promote consumer education and awareness, or a clean bill of health.
- The OFT has worked closely with TPR, the Financial Conduct Authority, the DWP and industry groups including the ABI throughout this study. It is grateful for their contribution to this work.