UK OFT agrees reforms to UK defined contribution pensions market

The Office of Fair Trading (OFT) has published the findings from its market study into defined contributions (DC) workplace pensions.  Overall, the OFT found that competition alone cannot be relied upon to drive value for money for all savers in the DC workplace pension market and has secured the agreement of the industry (the Association of British Insurers (ABI) and its members)  and The Pensions Regulator (TPR) to take a number of important steps to tackle these problems.   

The OFT's market study found that the combination of two factors mean some savers do not get value for money:

• The complexity of the product makes it difficult for individual savers and employers to make the right choices about pensions
• Employers, who are responsible for deciding which pension scheme to choose for their employees, may lack the capability or the incentive to assess value for money.

These weaknesses have already created a risk of savers losing out in two parts of the market:

• Old and/or high charging schemes - some £30 billion of savings in old and/or high charging contract and bundled-trust schemes may not be value for money.
• Small trust based schemes - some £10 billion of savings in smaller trust-based schemes are at risk of delivering poor value for money as a reult of low levels of trustee engagement and capability.

The OFT is also concerned that similar problems might occur in the future without measures to improve the governance and scrutiny of pension schemes on behalf of savers and the quality of information available.  Accordingly, a number of steps have been agreed with the industry and TPR, which include:

• agreement by the Association of British Insurers (ABI) and its members to an immediate audit of old and high charging contract and bundled trust schemes., to be overseen by an independent project board;
• rapid action by the TPR to assess which smaller trust based schemes are not delivering value for money;
• consideration by the Department for Work and Pensions (DWP) of whether new enforcement powers to tackle the problem should be given to TPR;
• agreement by the ABI that its members will establish independent governance committees to strengthen the scrutiny of pension schemes on behalf of employees.

The OFT has also recommended that the DWP should consult on improving the transparency and comparability of schemes to make initial choice easier for employers, and preventing schemes being used for auto-enrolment that contain in-built adviser commissions or that penalise members with higher charges when they stop contributing into their pensions.

The OFT has provisionally concluded that the legal test for making a Market Investigation Reference (MIR) to the Competition Commission is met. but bearing in mind the steps in place to address the competition concerns identified, has provisionally concluded that an MIR would not be appropriate in this instance.  This provisional decision is being consulted on and responses should be submitted by 31 October 2013.