Office of Fair Trading to Examine Defined Contribution Pensions

The move to auto-enrolment means that as many as nine million employees will be enrolled in pension schemes over the next five years. With such an upsurge in retirement saving, the Pensions Regulator and the Office of Fair Trading want to make sure that charges are kept reasonable and employees’ retirement savings are given the best chance to grow.

The Pensions Regulator has, for months, been urging employers to take a close look at how the auto-enrolment change will affect their company financially – and how easy it will be to meet both their needs and the needs of their employees . With so many changes hitting the pensions sector at once, the potential for problems or mis-selling has increased. The Office of Fair Trading’s move, to look into the management of defined contribution schemes, has been welcomed by industry observers.

“The environment is changing dramatically and auto-enrolment is set to bring millions of workers into pension savings” said Otto Thoresen, director general of the Association of British Insurers.

“Pension charges have fallen to their lowest level,” he added, “and industry initiatives are set to ensure charges and costs are disclosed clearly in a consistent format, and that people nearing retirement get more help to get the best pension deal.”

Defined benefit dangers…

In defined benefit pensions, contributions from employees are invested by scheme trustees, with the intention of building up as large a fund of money as possible for retirement. The problem is, come retirement, there’s no guarantee of a level of income – and both the Pensions Regulator and the OFT want to make sure retirement savers are getting a good deal.

The OFT enquiry will last until August 2013, and look at levels of competition, between pension companies running direct contribution schemes. The aim is to see how much pressure companies are under to keep charges down – and find out how much information and choice employees are given when they begin retirement saving, or decide to move between schemes.

The OFT inquiry follows TPR’s own move to ensure fairness and good practice – in the form of a regulatory framework, for employers and scheme trustees, to help promote fairness and avoid conflicts of interest. The regulations are also aimed at the point of retirement – when employees choose their final annuity rates. Scheme trustees should be aware of their obligation to  inform employees of the possibility of selecting from a variety of annuities – not just the one offered by their workplace scheme.

Not just a cost problem…

The OFT and TPR’s regulatory moves have been welcomed by the industry. Joanne Segars, chief executive of the National Association of Pension Funds called the OFT plan a “useful initiative”:

“Millions of people will get a new workplace pension under the much-needed reforms,” said Segars, “they need to have more confidence in the product”.

Other observers pointed out that while the regulatory effort is welcome, the enquiries’ focus may be too narrow – and should take in wider problems of governance faced by scheme trustees.

“The principal problems exist with legacy schemes and smaller trust based arrangements.” said Tom McPhail of Hargreaves Lansdown:

“I’m also concerned that the OFT investigation may focus only on price,” McPhail added, “without looking at important aspects of pensions such as quality of administration, stability and crucially, member engagement.”