OFT report into 'poor value' pensions: five key points for employers
Laith Khalaf, September 20, 2013
Yesterday, the Office of Fair Trading (OFT) published its report into the £275 billion defined contribution (DC) pensions market.
It found savers are "not getting value for money", and recommended a number of reforms to improve the scrutiny of pension schemes on behalf of savers.
Laith Khalaf, head of corporate research at financial services firm Hargreaves Lansdown, provides some key points for employers.
1. Charges are important but quality matters too
The OFT has decided not to recommend a charge cap, in part because if set too low it could reduce the quality of pension schemes.
Employers should observe this principle when choosing a scheme: charges are important, but so are investment returns and the quality of member communications and administration, which may be impaired if cost is considered to the exclusion of all else.
A cheap pension isn't fit for purpose if employees aren't contributing to it, or are invested in a poor fund and can't get decent, timely information on their savings.
2. Employers should review pension schemes set up before 2001
The OFT deems these schemes to be at risk of delivering poor value for money. The ABI is carrying out an audit of 'at risk' schemes, but with auto-enrolment in full swing employers should pre-empt this by reviewing the scheme themselves. There are an estimated 1.4 million members in these schemes and £30 billion of assets.
Furthermore, simply because a scheme was set up after 2001 does not guarantee it is providing value for money. The OFT report shows a trend of declining charges since 2001; the longer ago a scheme was set up, the less likely its members are benefitting from this trend. Employers should regularly review their schemes to ensure they are still delivering value for money.
3. Employers should review trust-based arrangements with fewer than 1,000 members
Again the OFT deems these schemes to be at risk of delivering poor value for money, though they currently hold £10 billion of assets. Employers with these schemes should consider whether a master trust or a contract-based scheme would be better value for money.
4. The OFT recommends active member discounts should be banned
The pensions minister has also signalled his opposition to these charges. Employers selecting schemes for auto-enrolment on this basis may want to consider whether this is realistically a long-term solution given the regulatory pressure to have them abolished.
5. Schemes should adopt minimum governance standards
The OFT recommends that the government should embed minimum governance standards in all pension schemes. Employers can get ahead of the game by introducing their own governance procedures, such as a pension governance committee which meets at least once a year. This ensures the quality and value provided by the pension is subject to ongoing scrutiny.
One thing the OFT Report is silent on is how to encourage member engagement, though it recognises the importance of this enterprise.
Good governance and quality pensions can certainly help improve member outcomes. Ultimately, however, getting members to save enough and to invest in a fund which is suited to their individual circumstances comes down to getting them involved and engaged in these decisions.