Failure to reform pensions lets down savers

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IT WAS billed as a market study into defined contribution workplace pensions. Not sexy.

But then, nor is the fact that workers have billions of pounds in pension savings stuck in expensive schemes that levy steep exit fees on those wanting to escape.

The rate at which their pension pots are eroded is equalled only by the resultant loss of trust in the pensions industry.

The Office of Fair Trading (OFT) report published on Thursday was instantly labelled a “crackdown” as these things often are, regardless of the content. The study focused primarily on costs and transparency in the £275 billion defined contribution workplace pension market.

This is a huge and rapidly growing market. Defined contribution schemes are already the main form of workplace pension, with final salary schemes all but extinct in the private sector, and millions more people will be moved into these pensions over the coming years following the launch last year of automatic enrolment.

Yet far too many workplace pension schemes charge over the odds, wiping out vast chunks of hard-earned savings. The culprits are typically pre-2001 pension plans, with insurers having introduced far cheaper schemes over the past decade or so. Unfortunately, however, they’ve left millions of savers stranded in those expensive legacy plans and will penalise them heavily if they want to get out. Alarmingly, the OFT revealed that such costly legacy schemes account for one in four of those into which people are being automatically enrolled.

Research last year by the Pensions Institute at Cass Business School estimated that employees in some old-style pensions could lose up to half their pension pot to charges.

The OFT had been expected to recommend a 1 per cent cap on pension charges, yet it fell short. Instead it said it was “holding off on that for now”, even while it admitted that a cap might be “the right thing to do”.

Let me translate that: the OFT is saying “We meant to do it, but insurers shouted at us and we bottled it.” Instead it is letting insurers conduct their own audit into pre-2001 legacy schemes to identify those charging above 1 per cent, something they should have done years ago.

The OFT also wants the Department for Work and Pensions to look into ways of improving transparency and comparability of pensions, in particular to help firms make the right choices for their employees. Under auto-enrolment there’s a risk that workers at small firms especially could be placed into expensive pensions when there are far better options available, significantly undermining the reforms.

So to summarise: the report into whether workplace pension schemes are good value for their members concluded that they are not. No surprise there. Nor is it a surprise, sadly, that the OFT failed to act decisively on its findings and take the bold steps needed to protect savers.