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September 20, 2013 6:18 pm
The Office of Fair Trading this week recommended a number of reforms to ensure workplace pensions savers get better value for money, after finding £40bn worth of savings were at risk of poor value. But it stopped short of recommending a cap on charges, as some had advocated.
The OFT found that competition alone could not be relied upon to deliver value for savers in defined contribution schemes, where the saver does not have any guarantee of the size of their pension pot.
It said that in older schemes, largely set up before 2001 but still housing more than £30bn of assets, savers are paying charges of 1 per cent or much higher. As many as 190,000 savers are thought to be enrolled in these schemes, whose costs can slice about 20 per cent or more off the value of a pension pot over long periods.
The OFT also said it was concerned about savers in 3,000 smaller pension schemes of 1,000 members or less, who may be at risk because of poor governance. About £10bn is held in these schemes.
The Association of British Insurers (ABI) and its members have agreed to an immediate audit of the older schemes, and the trust-based plans to be overseen by an independent project board.
For new schemes, the ABI has agreed that its members will establish independent governance committees, to represent members’ interests. Committees should recommend changes to providers and escalate issues to regulators where they see risks of poor outcomes for savers.
The OFT has also recommended that the government should ban the practice where members leaving a scheme – for a new job, for example – are penalised with “deferred member charges” or “active member discounts”. The watchdog recommends that the government consult on ways to improve transparency, to make it easier for employers to compare schemes on cost and quality.
The report did not call for a charge cap, as many had anticipated, but Steve Webb, pensions minister, has said he will still proceed with a consultation on capping charges.
Advisers said that savers in high-charging schemes can transfer their pension savings to a better value scheme – but should check first that doing so will not leave them worse off. Some older pension schemes have exit charges or fees for leaving, which will be deducted from the fund. They may also have valuable guarantees linked to income at retirement that are worth keeping.
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