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Pensions: who is looking after your best interests?

A new report is calling for pension providers to have a duty to work in their customers' best interests.


by Michelle McGagh on Jul 30, 2012 at 14:21

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.

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5 comments so far. Why not have your say?

David Chapman

Jul 30, 2012 at 18:01

The financial services industry has a shocking record when it comes to looking after customers interests - as evidenced by all the scandals that have erupted over the last few years - I am afraid the industry will see the NEST scheme as yet another way of screwing yet more money in the form of charges and levies from the employee most of which will impact on the long term benefits of the scheme.

I hate to be so negative but this scheme has all the hallmarks of yet another monumental scandal 30 years down the line.

I hope I am wrong - but as said in the article - a powerful independant regulator needs to be permanently and vigilantly on the case

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Rob Walker

Jul 30, 2012 at 18:26

Well. who can explain SERPS or other Earnings Related state pension schemes? Ask the man in the street and you'll get a blank look. So if the general public are sitting ducks for any scam (political or otherwise). Every new scheme attracts the same old cronies (FSA et al) in for a piece of the action to 'Protect our interests' - pull the other one.

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Jul 31, 2012 at 01:06

Will they also address the charges of SIPP pensioneer trustees at the same time, and some of the charges if you decide to change?

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Tony Peterson

Jul 31, 2012 at 06:24

The best interest of a customer would be if the service was free. No charges.

In which case, of course, who would provide the service? No one.

My advice is to provide your own pension by buying income producing assets with any surplus income you have, when you have it. The unholy link between tax bribes from the government and a greedy, but fundamentally unproductive, money shuffling industry should be broken.

That would be in everyone's best interest.

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Tongue of Fire

Jul 31, 2012 at 09:53

The use of a contract based scheme removes the prime duty of care of a trustee from the equation and replaces it with a contractual duty which is no more than a joke. The influx of American providers into this non-trust environment will ensure that all investments will be FATCAed and in other words reinvested into the States and held there at a future loss. Is this really what Britain, whether Little or Great, needs?

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