BILLIONS of pounds of retirement savings are at risk of delivering poor value for money, the UK’s trading watchdog warned, as it ordered a crackdown on the pensions market.
The Office of Fair Trading (OFT) said a shake-up of the industry is needed to protect nine million people with workplace pensions from rip-off charges.
In a new report, the OFT said that up to £40 billion of savings could already be in schemes which are delivering poor value or are at risk of doing so.
New powers for the UK’s Pensions Regulator to protect savings were among the reforms backed by the OFT, with the watchdog’s chief executive, Clive Maxwell, saying he might also consider a cap on controversial management charges in the
The OFT’s warning about the risk to savings led to calls from MSPs and consumer groups for a crackdown on charges that can erode the final value of a pension quite dramatically.
John Wilson, SNP MSP, backed a cap on charges and “full protection” for savers.
He said: “People contributing to retirement pension schemes have not been protected against unscrupulous employer pension funds or government hits on these funds.
“Not only should there be a cap on charges, there should be full protection for savers to ensure their funds get the maximum benefit for their pension contribution.”
Margaret Lynch, chief executive of Citizens Advice Scotland, called for action to deliver “watertight” pension schemes, while industry regulators “should have powers to take action” to protect savers.
She said: “Pension schemes need to offer value for money for the people who invest in them. They also need to operate transparently, with all charges and fees made clear so that people are able to make the right choices.”
Around £275bn worth of assets are currently held in defined contribution (DC) workplace pension schemes, but this is set to at least double by 2022 as the UK government’s automatic enrolment scheme is extended to encourage more people to save for their later years.
The OFT found that “most employees do not engage with, or understand, their pensions” in an industry where saving is seen as vital to the scheme being a success.
Money-saving expert Martin Lewis backed the idea of a cap on charges as he called for “some sort of regulation” in the pensions industry.
He said: “The recommendations are good as sometimes pension choices are so confusing and we need the regulator to ensure that people are not ripped off. The big problem is that it’s very confusing and there is no right answer about what is the best choice for investment.
“We need to ensure that people get as much return from a good investment as possible.”
Pensions policies are reserved to Westminster and UK ministers were urged to consider improving the transparency and comparability of different pension schemes.
The Pensions Regulator will take “rapid action” to look at whether some smaller schemes are not delivering good value and it could be given new enforcement powers to clamp down on this.
The UK government should also look at preventing schemes ramping up management costs for people when they stop contributing to a pension, such as if they change jobs, the OFT said.
Under existing arrangements, savers in some older schemes set up before 2001 have management charges that can be much higher than those set up later, it added.
The OFT, which looked at how well competition works, said the buyer side of the pensions market was “one of the weakest” it has seen in recent years.
OFT chief executive Mr Maxwell stopped short of recommending a cap on management charges, although he did say that was something which could be considered in the future.
However, the UK government announced it will consult on a cap, after pensions minister Steve Webb expressed his support for the idea earlier this week.
Mr Webb said: “This report outlines further important ways to help consumers, and we will act on its recommendations.
“In particular, we need to ensure those already in pension schemes are getting good value for money, and will be actively involved in the audit of pension schemes sold prior to 2001.
“We will consult shortly on the full range of options to protect consumers, including minimum-scheme standards, and further action on charges and charge transparency.”
Greater protection from charges would be welcomed by workers, but businesses fear they could be hit by more red tape as a result.
David Lonsdale, assistant director of CBI Scotland, said: “Businesses, providers and savers all need to up our game to ensure good quality.
“Small businesses need help to make decisions on the best scheme for their employees, but this mustn’t result in additional red tape and expense. Many businesses already provide pensions at well above auto-enrolment level, and must be allowed to continue to make their own judgments about what is best for them and their staff.”
However, Scottish Green leader Patrick Harvie backed a shake-up of the pensions industry to deliver a “fair benefit from the system” for savers.
He said: “Over the years, we’ve seen some specific groups of pensioners lose out dramatically due to mismanagement and fraud, and there’s always been a fear that this complex and at times chaotic market would only really ever serve the interests of those who are already wealthy and able to buy the best pensions advice.”
Labour’s shadow pensions minister, Gregg McClymont, said: “People need to be able to trust their pensions are good value. Labour is prioritising dealing with this as an important part of tackling the cost of living crisis facing Britain.”
Q&A: What defined contributions will mean for future savers
The Office of Fair Trading (OFT) has carried out a probe to make sure enough competition is being injected into the pensions market to benefit millions of new savers who are being brought into defined contribution schemes.
Q What are defined contribution (DC) pension schemes?
A These are schemes where the amount of cash you are putting in is specified but the benefits you will reap when you retire are less clear.
The size of the retirement income you will get with your savings pot depends on factors such as the performance of investments in the scheme as well as annuity rates. Rates can vary widely and have been in general decline in recent years as people live longer.
Q Why is the OFT looking into these schemes?
A This type of scheme is seeing the biggest area of growth in the pensions market as the government rolls out reforms to tackle concerns that people are not saving enough for their old age. They have largely replaced expensive “final salary” schemes, which give people a guaranteed retirement income.
Q What issues with the market has the OFT previously raised concerns about?
A In its interim findings the OFT found pension charges were hard to compare in some cases because providers did not present them consistently.
The OFT said it was also worried that several schemes may “not have a realistic prospect” of growing large enough to generate value for those enrolled into them.
Q What measures are open to the OFT when it carries out market studies?
A Options range from giving the market a clean bill of health to making recommendations to bodies such as the government or making a referral to the Competition Commission.
Key points: How to give pension savers best value
The Office of Fair Trading (OFT) report into the defined contribution (DC) pensions market found competition in the sector was not strong enough to give all pension savers the best value. Its key findings were:
• Many employers and employees do not know much about pensions.
The OFT described pensions as “complicated products, the benefits of which occur, for many people, a long time in the future”.
It said that most employees did not understand or engage with their pensions. The report also pointed out that employees did not make many of the key decisions which would determine the eventual size of their pension pot.
While it was the employee who actually took on the risks and rewards of a DC pension, the choice of which scheme they were placed in rested with their employer.
But many employers “do not have the necessary understanding” to make good judgments about the value of pension schemes and their focus may be on driving down administration costs over making sure the scheme offered the best value for their employee, the report said.
• A lack of consistency in the way charges were presented also made it hard for employers to compare costs, the report said.
• Some old and high-charging schemes containing around £30bn worth of savings may not be delivering value for money, the OFT said. In addition, some smaller trust-based schemes, containing around £10bn worth of savings, were also at risk of giving poor value due to low levels of trustee engagement and capability.
• The practice of “active member discounts” is likely to harm consumers.
Active member discounts describe a charging structure whereby active members of a pension scheme pay lower charges than those who are no longer paying into the scheme, perhaps because they have changed jobs.
The OFT was concerned that given people’s lack of engagement with pensions, many did not realise that their charges could rise when they have left a scheme.
Employers are also likely to be more focused on negotiating the best possible deal for members of the scheme who are still active.
• Better governance standards are needed to ensure that pension schemes are scrutinised consistently.
The Association of British Insurers (ABI) has agreed that its members will set up independent governance committees by mid-2014 to strengthen the scrutiny of schemes on behalf of employees.
• A cap on pension charges is not needed for now.
The OFT said it had considered the possibility of a cap but it was concerned that such a “blanket approach” could result in some benefits, such as guaranteed annuities, being dropped from schemes, which would have an adverse impact on savers.
People buy an annuity with their pension pot when they retire and this sets the size of their pension income for life.