The Office of Fair Trading (OFT) has announced the results of its study into competition in the workplace pensions market. After a detailed investigation into defined contribution (DC) pension schemes, also known as money purchase schemes, the OFT says it has reached agreement with The Pensions Regulator for a series of reforms to be implemented.
The OFT made looking at this area a priority in light of the fact that membership of DC schemes is expected to increase dramatically following the launch of auto-enrolment. Starting with the largest companies, which were required to comply by October 2012, all employers in the UK will need to contribute to a pension scheme for any employee who wishes them to do so. It is currently anticipated that the very smallest companies will need to set up such a pension scheme by February 2018, and there are many staging dates between now and then for firms of different sizes.
It is predicted that membership of DC schemes will increase from the current level of around five million to around 14 million over the next five years.
The OFT study has concluded that employers “often lack the capability or the incentive to assess value for money” when faced with choosing a pension provider for their scheme.
The principal recommendations made by the OFT are:
- The Pensions Regulator will conduct an assessment of smaller, trust-based schemes to establish which ones are not providing value for money. The Department of Work & Pensions (DWP) will consider whether the Regulator needs to be given additional enforcement powers in this area.
- The Association of British Insurers (ABI) will conduct an audit of bundled trust schemes. These older pension arrangements often have higher charges.
- ABI members will establish independent governance committees, which can recommend changes to schemes and can refer issues to regulators.
- The DWP will consult on making it easier for employers to compare costs and other features of pension schemes, and on how schemes can be prevented from charging built-in adviser commissions.
It is estimated that £40 billion is invested in smaller trust-based schemes or bundled trust schemes, the two types of pension arrangement which were identified as being particularly poor value for money.
The OFT did not decide to refer the market to the Competition Commission, nor did it impose a price cap.
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.”