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Providers face scrutiny as OFT investigates DC schemes

by Alex Steger on Jan 17, 2013 at 07:45

Providers face scrutiny as OFT investigates DC schemes

Pensions providers are to come under scrutiny from the Office of Fair Trading (OFT) which has launched a study into defined contribution (DC) pension schemes examining whether they are set up to deliver the best value for money for savers.

Following the advent of auto-enrolment in October last year, which will add between six and nine million workers to the four million that already save into a DC scheme, the OFT said it had decided to study ‘whether competition will work in the best interests of these savers to deliver low cost, high quality pension schemes’.

The OFT will be working closely with the Department for Work and Pensions, The Pensions Regulator, and the Financial Services Authority during the course of its study.

The research will focus on value for money and the size of pension pot savers end up with at retirement.

It will look at the following:

  • How pension providers compete with one another and how the market may develop over time.
  • Whether there is sufficient pressure on pension providers to keep charges low, and the extent to which information about charges is made available to savers.
  • Whether smaller firms face difficulties in making pension decisions in the interests of their employees.
  • Whether smaller firms receive appropriate help and advice in setting up and maintaining workplace pension schemes.
  • Barriers to switching between schemes and a potential lack of ongoing employer engagement in setting up and managing pensions.

Mary Starks, senior director in the OFT's Services, Infrastructure and Public Markets group, said auto-enrolment meant it was important savers got a good deal.

‘We want to take a look at the market now to ensure that providers are competing to offer the best possible deals, and that the choices made by employers mean that employees are saving into good pension schemes for their retirement,’ he said.

The research is set to be complete the by August 2013.

The OFT’s move comes after months of mounting pressure from politicians on providers over the transparency and cost of schemes.

In October 2012 shadow pensions minister Gregg McClymont called on the OFT to probe the pensions industry over high and unclear charges.

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9 comments so far. Why not have your say?

The optimist

Jan 17, 2013 at 08:47

Up until 3 weeks ago members could have a scheme with no initial charges and a single charge based on the size of their fund. After a couple of years membership they had a penalty free transfer or retirment value (aside from market movements) of pretty much what they'd paid in. The employer got advice as the provider was somehow able to cost in a payment to the adviser from within the single management charge.

Then came RDR.

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SassenachinGlasgy via mobile

Jan 17, 2013 at 09:51

After years in Avivas DC scheme, with a total 14% contribution and average 10% tax relief, I pretty much broke even. It was only in the last 2 years that I self selected and achieved some growth!! Aviva For Investors or is that shareholders.

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Nigel Bracken

Jan 17, 2013 at 10:01

No need to worry now we have NEST - once this review is done anything charging more than NEST will be "poor value" as far as this collection of regulators will asses - qualitative factors will be dismissed. Then in a few years time paying contributions will be made compulsory and advisers and some providers will be by-passed totally.

You would have thought the OFT would have higher priorities dealing with the proper cartels - banks, supermarkets, energy suppliers, mobile phone networks and so on but these organisations defend themselves vigoursly and we never have.

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Richard Ellis

Jan 17, 2013 at 10:12

I would completely agree with the optimist.....if churning did not exist in the IFA sector.... How can one fathom that a pension scheme is profitable for the provider charging 0.5% amc only, paying a slug of initial commission when the scheme is transferred to a new provider ever 4 years? The model is broke.

Your post suggests that you do not believe that companies will pay a fee for advice??

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Jan 17, 2013 at 10:19

Is it the pension providers or the employee benefits consultants that are to blame? the providors really only want to sell automated managed investments with only a few self select options available. Benefits consultants do their upmost to ensure they have no contact with employees, in case they get blamed. Nest is almost as poor but have to cover start up costs and a civil service mentality. The only way to get employees to fund adequate pension provision is to get them involved with the investment process, but what with the poor advice over the past few years from advisery groups and the new impact of RDR, I cannot see how this can be achieved given someone has to pay for individual advice.

OFT should not concentrate on cost per see, but value and service provided by that cost. The past few years of group pension advice has been disgraceful. If the employee does not buy in, then neither group nor NEST will be sucessful. Don't position pension contribution as a cost, but an opertunity!

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Jan 17, 2013 at 10:31

Does this mean that DC schemes that had indexed monthly policy charges on a plan that the member had been forced to make paid up, so that the value eventually erodes down to £zilch, are now going to be looked at?? Many of these were SOLD after the Financial Services Act came 'live' in the late '80s. Yet they are going to "face scrutiny" now, when the providers have disappeared and the "sales force" responsible untraceable?

You couldn't make it up

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Scott Atkinson

Jan 17, 2013 at 11:06

So who is responsible for looking in to the auto enrolment of all uk employees in to the State Pension sysytem by way of NI contributions and the qute pathetic pension they receive from it in retirement. The amount gets ever smaller and the wait to receive it goes on and on. Oh, that's right, the Government take no responsibility and you can't sue them.

With RDR and auto enrolment the Government and the FSA have created an environment for no advice to the people that need it and no responsibility when it goes wrong. Who do you complain to when the NEST default investment fund goes pear shaped?

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j p

Jan 17, 2013 at 11:21

i hope the OFT have the breadth of skills to look at "value" as this typically has to involve a business case / balance sheet of some description. Costs are a spreadsheet, which can be done in a day or two. Value is something else

- 2 year vresting

- tax relief

- behavioural finance

- annuitisation

- charges

- salary sacrifice

- pound cost averaging


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Jan 17, 2013 at 12:27

Oh wow, the OFT said it had decided to study ‘whether competition will work in the best interests of these savers to deliver low cost, high quality pension schemes’.

Lovely jubbly, lots of "work" to do for years to eventually prove that competition will work in the best.....blah blah blah....

And this from an organisation that (from it's own website) states that one of its tasks is......

"The OFT is responsible under the Financial Services and Markets Act 2000, which regulates financial services and markets, for keeping under review the rules and practices of the Financial Services Authority (FSA) "

I wonder how many studies it carried out focussing on THAT and what were its conclusions?

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