British government pushes more people to save for retirement
LONDON (Reuters) — A UK watchdog has unveiled proposals to shake up the 275 billion-pound ($439 billion) defined contribution pensions market, parts of which offers poor value for money for up to five million savers.
The Office of Fair Trading (OFT) has stepped in to increase confidence in workplace pension schemes and bolster efforts by the British government to get more people to save for retirement, relieving pressure on taxpayers.
Concerns over value for money, the ability of pensions to provide meaningful retirement income and whether employers and trustees are choosing the right pensions for staff, have discouraged many workers from parting with their cash.
Now, the OFT and the Pensions Regulator have agreed to address these issues and look at which trust-based schemes, currently managing around 10 billion pounds of pensions savings, could be failing members in these ways.
They are also looking into high fees charged to members of older contract and bundled trust schemes with around 30 billion pounds of savings. The OFT estimates that members in pre-2001 schemes pay annual management charges some 26 per cent higher than members of schemes launched after this date.
"We have found problems in relying on competition to drive value for money for savers in this market," OFT Chief Executive Clive Maxwell said in a statement. He said the OFT had worked with government, regulators and industry to agree a set of measures to help to ensure that savers get a better deal.
The OFT also found employers often lack the experience or incentive to assess value for money when deciding which pension scheme to choose for their employees.
This problem could grow as a government-sponsored auto-enrolment initiative, aimed at solving the country's retirement savings timebomb, rolls out across Britain in the coming months, the OFT said.
To tackle these concerns, the Association of British Insurers has agreed to an audit of bundled trust schemes and to help to set up independent governance committees to increase scrutiny of pension schemes on behalf of members.
"It is important to remember that the level of contribution and how long someone works remain the most important factors in determining an individual's overall retirement income," ABI Chief Executive Otto Thoresen said.
The OFT has also recommended that the Department of Work and Pensions increase transparency and comparability of pension scheme costs and quality in order to make employers' selection process easier.
Adrian Boulding, Pensions Strategy Director at Legal & General has called on the government to introduce a cap on the charges payable by pensions savers in both new enrolment schemes and legacy workplace pensions.
"We firmly believe that no employees saving in a workplace pension scheme should have to pay more than half a per cent a year of their retirement savings pot whatever the size of the scheme and that low charge should be available for legacy pension scheme members too," Boulding said.
Lee Hollingworth, partner at consultant Hymans Robertson said he hoped planned reforms on how to improve quality of advice to savers wouldn't be lost in a debate on fees.
"At the moment the system relies too heavily on savers engaging with their scheme, but the majority of people are not equipped or interested in becoming their own pension adviser," Hollingworth said.
He said savers needed clear information on what income they can expect to retire on along with more hands-on direction on how to reach their retirement target.
Last October, the government introduced automatic enrolment, requiring employers to pay into a workplace pension scheme for all staff unless they opt out. Automatic enrolment is being introduced over the next six years.
Defined contribution schemes are those where the size of the pension pot is linked to the contributions made by the individual in their working life, the costs of the scheme and the performance of the investments.