Hundreds of thousands of people are saving for retirement into pension schemes which are poor value for money due to high charges and poor governance, an investigation by the Office of Fair Trading has found.
Its report into the complex £275bn defined contribution pension market, which covers about five million people, has found old and high charging contract and bundled trust-based schemes "may not be delivering value for money".
It also found smaller trust-based schemes are at risk of delivering poor outcomes for savers due to low trustee engagement and capability. These were also deemed poor value for money.
The OFT said it would work with The Pensions Regulator (TPR) on a set of reforms to the industry in light of automatic enrolment which will see millions more peoplepushed into saving through defined contribution pension arrangements.
However, it stopped short of recomending a cap on management fees.
At present five million people saving through such schemes. This is set to rise by up to nine million over the next five years.
OFT chief executive Clive Maxwell said: "Automatic enrolment has the potential to expand and change the market for pensions in the UK for the better.
"Whether people are starting pension-saving for the first time through automatic enrolment, or have already been saving for years, it is vital that they are saving in schemes which deliver good value for money.
"We have found problems in relying on competition to drive value for money for savers in this market.
"We've therefore worked closely with the government, regulators and industry to agree a set of measures that we believe are an important step in helping to ensure that savers get better outcomes.
"It is important, particularly given that automatic enrolment is already under way, that these measures are implemented rapidly."
To improve this market, the OFT has secured agreement to "important steps" in tackling these problems:
• to address the OFT's concerns about small trust-based schemes, TPR has agreed to take rapid action to assess which smaller trust based schemes are not delivering value for money. The Department for Work and Pensions (DWP) has agreed to consider whether the TPR needs new enforcement powers to tackle the problem
• to address the OFT's concerns about old and high charging contract and bundled trust schemes, the Association of British Insurers (ABI) and its members have agreed to an immediate audit of these schemes. The audit will give a full understanding of the charges and any benefits associated with these schemes and ensure savers are getting value for money. This will be overseen by an independent project board
• to strengthen the scrutiny of pension schemes on behalf of employees, the ABI has agreed that its members will establish independent governance committees. Committees should recommend changes to providers and escalate issues to regulators where they see risks of poor outcomes for savers.
In addition, the OFT has identified a number of practices that it thinks will lead to savers losing out without action by the government.
As a result, it is recommending the DWP consults on boosting transparency and comparability of information about the cost and quality of schemes to make it easier for bosses to choose what to offer.
It also said the DWP will consult on 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 merits of "active member discounts", where members who still contribute to the scheme are charged less than "deferred members" who have ceased contributions have been debated for a number of years.
Aegon managing director of workplace solutions Angela Seymour Jackson backed the OFT's conclusions.
She said: "The OFT’s review was prompted by the surge in membership of DC schemes brought about by auto-enrolment.
"The industry commitments to the audit and to strengthening governance will go a very long way to giving members confidence they are being auto-enrolled into good schemes.
"The DWP’s charges consultation needs to weigh up the pros and cons of any further detailed interventions.
"Critically, we must not risk undermining the broader auto-enrolment agenda.”
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation