The OFT recommended a set of reforms to help reduce the complexity of DC pension schemes and to help employers make better choices on behalf of their employees’.
The regulator decided not to refer the situation to the Competition Commission or impose a cap on pension charges, though the government has said it will go ahead with a consultation on a possible cap anyway.
The OFT said that with the introduction of auto-enrolment, which will see all but the smallest of firms being obliged to offer employees’ a contributory pension scheme, the current problems could become worse because employers “often lack the capability or the incentive to assess value for money.”
Clive Maxwell, OFT Chief Executive, said: “Automatic enrolment has the potential to expand and change the market for pensions in the UK for the better. It is vital that they are saving in schemes which deliver good value for money.”
The study found that £30 billion of older trust-based pension schemes may not be delivering value for money and in many cases the charges are too high, up to 2.3 per cent, compared to the current normal rate of 0.50 per cent.
High charges can dramatically erode the value of a pension scheme.
A further £10 billion of smaller trust-based schemes are at risk of not delivering value for money because of “low levels of trustee engagement and capability”
It has agreed with the Pensions Regulator to quickly find out which of the smaller trust based pension schemes are not giving value for money and to consider if new enforcement powers are needed.
The Association of British Insurers (ABI) has agreed to make an immediate audit of the older, high charging schemes and to escalate issues to the OFT when it identifies poor practices that put savers interests at risk.
The Pensions Minister, Steve Webb said that he supported the idea of a cap and that the Department for Work and Pensions (DWP) might consider a 1.0 per cent cap on management charges.
Its report concluded that there should be improvements to the system so that it is easier for people to compare different pension schemes.
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