OFT launches pensions offensive

In the findings of a study launched in January 2013 into defined-contribution pension schemes, published on 19 September, it demanded an ‘audit’ of schemes with an AMC exceeding 1 per cent.

The Association of British Insurers (ABI) will carry out a review of ‘at risk’ contract-based DC schemes run by its members – comprising all workplace pension schemes sold pre-2001 and all those since with high AMCs – and the OFT has recommended that The Pensions Regulator (TPR) should tackle the issue with smaller trust-based schemes.

A broader look at charges and value for money was also recommended, with greater transparency encouraged.

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As MM surveys have shown, pension charges remain a huge issue, with many savers unaware of how expensive their pension is. But some providers inevitably will not reprice until pushed; ongoing charges are an attractive revenue stream.

The OFT’s approach fell short of some analysts’ expectations, with commentators calling for a cap on scheme costs. It defended not taking this approach for three reasons: it could result in benefits paid for by charges falling away; there are so many different constructions of legacy schemes that applying a blanket charge cap would be difficult; and a cap could create a ‘target’ for providers, causing rising prices or lowering standards.

Another important area tackled by the paper focused on commission, particularly in light of auto-enrolment.

“We are concerned that in some cases the existing schemes that employers propose to use have adviser commission built into the scheme’s AMC,” the OFT said. “Where an employer has used a commission-based adviser to set up a work-based pension scheme before the RDR implementation date, the adviser can continue to receive ongoing ‘trail’ commission in relation to his or her pre-RDR advice until the product matures or is terminated. If new members are enrolled into a scheme with ‘trail’ commission built into the AMC then new members may pay these commissions.”

It therefore recommended that the DWP should consult on preventing schemes with built-in adviser commission being banned from use for auto-enrolment pensions.