OFT calls for reform of DC pension schemes

What does it mean for pension savers?

The Office of Fair Trading (OFT) has proposed a series of reforms to defined contribution (DC) pension schemes, in what is expected to be a radical shake-up of the £275bn DC pension market.The news comes after an OFT investigation into the DC pension market revealed that these schemes were failing to offer value for money to pension savers.

DC schemes are a form of workplace pension where both employers and employees make a contribution. The pot is then invested into bonds or shares, with the size of the pension fund depending on their performance.

The OFT has called on the Pensions Regulator and the Association of British Insurers(ABI) to take decisive action to help identify schemes that aren’t helping savers get the best return on their investment.

The OFT has highlighted that the management charges attached to older DC pensions are as much as 26% higher than current schemes, arguing that this can strip the value of a pension pot by up to a third.

As an example, a 0.5% annual charge on a £440,000 pension pot, attached to current schemes, would reduce the overall size of the value of the pot by 11% to £390,000.

However, increasing this by just 0.5% a year to 1% would slash the value of the overall pot by a staggering 21% to £346,000.

Responding to these estimates, the ABI has argued that those schemes with charges that don’t represent good value for money represent just 10% of the nearly £300 billion of assets managed by the industry.

The ABI outlined that all of its members offering workplace pensions will be auditing the value offered by older schemes, under a Project Board made up of the Department of Work and Pensions (DWP), the OFT, regulators and the industry. This is set to be completed by December 2014.

“The pensions industry is reforming and changing. It is determined to build greater trust from consumers and employers so auto-enrolment can achieve its potential. We will continue to work with Government and other stakeholders in ensuring that pension reform is a success. The OFT report has been an important contribution to achieving that goal,” said Otto Thoresen, the ABI’s Director General.

Will DC pension scheme charges be limited?

The OFT has also called on a ban to Active Member Discounts (AMDs), a discount which effectively means that those still contributing to a scheme will pay less than those who have stopped contributions.

However, the fact that the OFT has stopped short of putting the case forward for a cap on DC scheme charges has disappointed some consumer groups.

Which? executive director Richard Lloyd said: “Unfortunately the Office of Fair Trading’s recommendations don’t go far enough to prevent billions of pounds of consumers’ money from languishing in poor value schemes.

“People need to see a difference today and be confident in the pension scheme that they’re automatically enrolled into, so that they’re encouraged to save for their retirement.”
Mr Lloyd went on to say that the government must take more radical action in an attempt to overhaul the DC pensions market.

“The Government must go further and set high-quality minimum standards for all workplace pensions as soon as possible, including a cap on all charges,” he added.
Pensions Minister Steve Webb has recently proposed a 1% cap on pension scheme charges for those employees that are “auto-enrolled” into workplace pensions by their employers.
“Some of the inflated charges we have seen in the past will be unacceptable in the future,” he said.

While welcoming Mr Webb’s proposal, the Trades Union Congress (TUC), the national trade union centre in the UK, argued that it viewed it as a “starting point” in the reform of pension scheme charges.

“We welcome the government’s plan to cap charges, but see the rumoured one per cent cap as simply a starting point in a process that sees charges brought down much closer to the 0.5 per cent level already achieved by some providers,” TUC General Secretary Frances O’Grady said.

“But defined contribution (DC) pensions must not just be low cost, they need expert governance that runs schemes purely in the interests of their members.”
The Office of Fair Trading (OFT) has proposed a series of reforms to defined contribution (DC) pension schemes, in what is expected to be a radical shake-up of the £275bn DC pension market.

The news comes after an OFT investigation into the DC pension market revealed that these schemes were failing to offer value for money to pension savers.

DC schemes are a form of workplace pension where both employers and employees make a contribution. The pot is then invested into bonds or shares, with the size of the pension fund depending on their performance.

The OFT has called on the Pensions Regulator and the Association of British Insurers(ABI) to take decisive action to help identify schemes that aren’t helping savers get the best return on their investment.

Old DC pension schemes charging sky-high management charges

The OFT has highlighted that the management charges attached to older DC pensions are as much as 26% higher than current schemes, arguing that this can strip the value of a pension pot by up to a third.

As an example, a 0.5% annual charge on a £440,000 pension pot, attached to current schemes, would reduce the overall size of the value of the pot by 11% to £390,000.
However, increasing this by just 0.5% a year to 1% would slash the value of the overall pot by a staggering 21% to £346,000.

Responding to these estimates, the ABI has argued that those schemes with charges that don’t represent good value for money represent just 10% of the nearly £300 billion of assets managed by the industry.

The ABI outlined that all of its members offering workplace pensions will be auditing the value offered by older schemes, under a Project Board made up of the Department of Work and Pensions (DWP), the OFT, regulators and the industry. This is set to be completed by December 2014.

“The pensions industry is reforming and changing. It is determined to build greater trust from consumers and employers so auto-enrolment can achieve its potential. We will continue to work with Government and other stakeholders in ensuring that pension reform is a success. The OFT report has been an important contribution to achieving that goal,” said Otto Thoresen, the ABI’s Director General.

Will DC pension scheme charges be limited?

The OFT has also called on a ban to Active Member Discounts (AMDs), a discount which effectively means that those still contributing to a scheme will pay less than those who have stopped contributions.

However, the fact that the OFT has stopped short of putting the case forward for a cap on DC scheme charges has disappointed some consumer groups.

Which? executive director Richard Lloyd said: “Unfortunately the Office of Fair Trading’s recommendations don’t go far enough to prevent billions of pounds of consumers’ money from languishing in poor value schemes.

“People need to see a difference today and be confident in the pension scheme that they’re automatically enrolled into, so that they’re encouraged to save for their retirement.”
Mr Lloyd went on to say that the government must take more radical action in an attempt to overhaul the DC pensions market.

“The Government must go further and set high-quality minimum standards for all workplace pensions as soon as possible, including a cap on all charges,” he added.
Pensions Minister Steve Webb has recently proposed a 1% cap on pension scheme charges for those employees that are “auto-enrolled” into workplace pensions by their employers.
“Some of the inflated charges we have seen in the past will be unacceptable in the future,” he said.

While welcoming Mr Webb’s proposal, the Trades Union Congress (TUC), the national trade union centre in the UK, argued that it viewed it as a “starting point” in the reform of pension scheme charges.

“We welcome the government’s plan to cap charges, but see the rumoured one per cent cap as simply a starting point in a process that sees charges brought down much closer to the 0.5 per cent level already achieved by some providers,” TUC General Secretary Frances O’Grady said.

“But defined contribution (DC) pensions must not just be low cost, they need expert governance that runs schemes purely in the interests of their members.”

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