Tougher regulation and a drastic cut to the number of intermediaries involved is needed to increase transparency and reduce the cost of pensions, a committee of MPs has been told.
Giving evidence to the Parliamentary Work and Pensions Select Committee, Michael Johnson, former Conservative party pensions adviser, and David Pitt-Watson, Hermes Focus Asset Management chairman, said charges needed to be clearer and lower in order for the pensions market to start functioning properly.
Johnson said the pensions system was ‘not fit for purpose’. He called for a ‘more assertive’ regulator and a cut in the number of ‘middle men’ involved in the pension market.
‘I don’t think competition works in financial services and the pensions industry because we have these chains of intermediaries which make it unclear what’s going on,’ he said.
‘What are these people doing? We don’t need 80% of this industry. We could do without most of the middle men. Few people come into financial services with the purpose of helping others.
He added: ‘The majority of people have very basic savings needs: a regular savings account and a vague retirement plan. So we have an enormously bloated industry, but there are piles of complexity and vague performance information.’
Pitt-Watson called for the restrictions on low cost workplace pensions provider the National Employment Savings Trust (Nest) to be lifted.
He also called on the government to press ahead with a cap on pension charges. While the pensions minister Steve Webb has threatened to impose a cap only if charges rose too high, Pitt-Watson questioned the government’s ability to understand charges at all.
‘They say they are keeping an eye on it…but if they already know what level of charges would count as abuse then why not just set the cap there? But they don’t even know what pension charges are; I don’t think the DWP could tell me.’
Johnson said the Open Market Option had ‘patently failed’ and called for a single central annuity clearing house.
Both Johnson and Pitt-Watson called for greater scale with Johnson suggesting the £30 billion of local government pension schemes should be merged in order to lead the way for the private sector.
However, the Pensions Policy Institute, which also gave evidence, said moves towards large collective defined contribution (DC) schemes would meet with resistance from employers wary of making pension promises.