OFT report into defined contribution schemes
In January 2013, the Office of Fair Trading (OFT) launched a market study to investigate whether the defined contribution (DC) workplace pension market is working well.
It is expected that automatic enrolment will bring about a sharp rise in the number of people with DC workplace savings plan, with up to nine million workers predicted to have been automatically enrolled by 2018. The OFT's investigation was to check whether these people are likely to get good value for money.
Today the OFT has published its findings.
It found that competition by itself is not enough to give most DC savers a good outcome. This is because:
- Pensions can be complex, which makes it hard for savers and their employers to make good choices.
- Employers choosing a workplace scheme do not always have enough understanding to choose well.
These issues could cause savers to lose out in two areas:
- Old or high-charging schemes - there are £30bn of savings in these, which may not be getting good value for money
- Small trust-based schemes - there is around £10bn in these, and they may deliver poor value due to low levels of trustee engagement and ability.
The OFT has made a number of recommendations:
Dealing with old or high-charging schemes - the Association of British Industries (ABI) has agreed to start an immediate review of these schemes.
Dealing with small trust-based schemes - the Pensions Regulator (TPR) intends to find out which schemes are not performing well. The Department for Work & Pensions (DWP) will decide if it would help TPR to have new powers.
Improving governance - the ABI has agreed that their members will set up independent governance committees to make sure that contract-based schemes are given independent scrutiny.
Improving information on charges - the OFT has asked the DWP to consult on improving information about charges so that they are easier to understand and compare.
Preventing future problems - some schemes used for automatic enrolment contain built-in adviser commission or charge members at a higher rate if they stop paying into the scheme. The OFT recommends that the DWP consults on how to stop this from happening.
Read the full report here.
Read more about automatic enrolment here.