The Office of Fair Trading (OFT) have published a report claiming that millions of investors are paying over the odds for their pensions.
Their report concluded that £40bn of pension funds currently represent “poor value for money”.
This is an important subject because five million people in the UK are currently saving for retirement using a defined contribution workplace pension scheme.
This number is expected to increase to around nine million over the next five years, once the government programme of auto-enrolment is fully completed.
The OFT identified weaknesses in two parts of the occupational pensions market which can lead to pension schemes offering poor value for money.
Old and high-charging contract and bundled-trust schemes, which contain around £30 billion of pension savings, may not be delivering value for money.
A further £10bn of pension savings are contained within smaller trust-based schemes.
These are at risk of delivering poor value for money as a result of low levels of trustee engagement and capability.
In order to improve this market, the OFT plan to take a number of steps.
The Pensions Regulator is taking rapid action to assess which smaller trust based schemes are not delivering value for money. They might get new enforcement powers to tackle the problem.
The Association of British Insurers (ABI) and its members have agreed with the OFT that they will audit old and high charging contract and bundled trust schemes.
The audit will give a full understanding of the charges and any benefits associated with these schemes, ensuring pension savers are getting value for money. It will be overseen by an independent project board.
The the ABI has also agreed with the OFT that its members will establish independent governance committees.
These committees will recommend changes to providers and escalate issues to regulators where they see risks of poor outcomes for savers.
A big criticism is levelled at providers who increase charges for employees who move to a new job.
This so-called ‘active member discount’ can result in a big increase to pension charges when a group pension member moves on to a new employer.
Back in October 2011, the Pensions Regulator warned that these active member discounts were not “fair” or “acceptable”. The OFT is now recommending that these are banned.
Higher charges can significantly reduce the value of a pension fund at retirement.
This is not to say that cheap is always better; pension savers should always consider getting best value for money, as factors including fund availability can result in slightly higher charges but a better long-term outcome.
If you are a member of a workplace pension scheme, it is important to seek advice, particularly if you change jobs.
These measures by the OFT should result in improved outcomes for pension scheme members in the future, but seeking independent financial advice today will ensure you are in the best pension arrangement based on your individual circumstances and goals.
Do get in touch if you have pension savings which you wish to review.
