Personal Pension  

Lessons of yesteryear

It was in this light that I read the recent Office of Fair Trading report on defined contribution pensions.

In the mid-1980s and early 1990s I worked for a couple of leading employee benefit consultants.

At the time we were administering the last of the big defined benefit schemes and engineering the switch to defined contribution for both big companies and for smaller employers.

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At the time, the DC market was rapidly developing – previously DB had been king, whereas money purchase, (then rebranded as DC) was very much the poor cousin. The aim seemed to be to replicate the good bits of the legal and governance frameworks of DB schemes with the focus moved to investment choice and member communication.

At the same time, the personal pension regime was developing and, in a parallel universe, the investment choice and communication were even more to the fore as individuals had the investment choice (and as is the case with DC – the investment risk).

So roll on a few years, with the stakeholder experience now behind us and with the auto-enrolment focus now switched on – we now like to call them all workplace pensions.

The OFT has produced a study to look at the DC pension market and whether competition alone could produce value for money and the required “good outcomes” for scheme members. The broad conclusions of the OFT fall into two categories:

- The complexity of pensions in general and how difficult it is to make the right choices.

- The failures of employers, where it appears they have lacked the knowledge or inclination to know what is best for their employees, to provide a scheme that gives value for money and those ever-elusive “good outcomes”.

At this stage the report acknowledges that as the auto-enrolment procedure continues and we reach the staging dates for smaller and even “micro” employers that this situation could get worse. In many cases we will be getting into unknown territory with companies facing pensions for the very first time. Indeed this is surely a nightmare scenario – if the employers who have had some inclination to be involved have failed then what chance do those employers with no inclination or even an active disinclination for pensions have?

The two main findings by the OFT concern some of the issues regarding old, seemingly by analogy, higher-charging schemes.

- The findings suggest that there is around £30bn of savings in old or high-charging contracts, of which many bundled trust schemes may not be value for money.

The report suggests that the AMC on pre-2001 schemes can be up to 26 per cent higher on average than schemes set up post-2001, and, in addition, schemes sold before 2001 are more likely to have other charges in addition.

- The findings also suggest there is an issue with small trust-based schemes where there are around £10bn of savings at risk of delivering poor value for money, due to low levels of trustee engagement and capability.