Pensions: who is looking after your best interests?

Campaign group FairPensions has called on the government to enforce a ‘fiduciary duty’ on pension schemes to ensure they work in the best interests of savers as the auto-enrolment of UK workers into pension schemes edges closer.

Auto-enrolment starts in October, and over the next four years some eight million workers who are not currently saving into a workplace pension will ‘auto-enrolled’ into one. All eligible workers will be enrolled into a pension, but they will be able to opt out if they do not want to save, although they'll be auto-enrolled every three years and will have to continue opting out.

The majority of workplace pension schemes that workers will be enrolled into are defined contribution (DC) schemes, where the employee bears all the risk. The worker has to make sure they save enough and rely on their investments performing well in order to get a decent retirement income.

These are also known as ‘contract-based schemes’ because the employee has a contract with the pension provider.

Workers shoulder the risk

DC pensions are popular with employers precisely because the risk is on the employee. Pension schemes where the employer bears the risk – defined benefit (DB) schemes – are quickly dying out because employers can’t afford the risk anymore.

DB pensions are known as ‘trust-based schemes’ because the employer has a board of trustees who look after the pension, making sure that it is invested properly and working to the benefit of the employees.

The trustees have two fiduciary duties. The first is of loyalty, which requires trustees to avoid conflicts of interest and put beneficiaries first. The second is of prudence, which requires them to invest funds wisely based on appropriate advice.

With the move from trust-based to contract-based schemes as employers replace DB schemes with DC schemes, FairPensions argues that fewer savers will be protected by these fiduciary duties, and as auto-enrolment starts the ranks of those left without protection will increase.

‘Auto-enrolment is predicated on savers’ inertia: most will neither make active choices about their pension, nor be in a position to evaluate the choices made on their behalf by employers, advisers and providers,’ said FairPensions in its report Whose duty? Ensuring effective stewardship in contract-based pensions.

‘These savers will be heavily reliant on those who manage their money. Ensuring that these entities are well-governed and act in savers’ long-term best interests will be critical to the success of auto-enrolment – both in terms of building trust in the system, and in terms of delivering decent retirement incomes.’

Who works for you?

FairPensions has warned that no one in the chain of a contract-based pension scheme has been given the task of working for the consumer.  

It said employers chose the pension scheme and provider of that scheme on the savers’ behalf, but do not have the incentive or the expertise to make sure their employees are getting a good deal.