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OFT warns £40bn of retirement savings stuck in poor value pension schemes OFT warns £40bn of retirement savings stuck in poor value pension schemes
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The Office of Fair Trading (OFT) has ordered a crackdown on the pensions market, saying some £40bn of savers' money is contained in schemes that may be delivering poor value.The Office of Fair Trading (OFT) has ordered a crackdown on the pensions market, saying some £40bn of savers' money is contained in schemes that may be delivering poor value.
It is recommending a series of reforms to the £275bn market for defined pensions, including new powers for the pensions regulator, and greater transparency on costs and performance from pension providers.It is recommending a series of reforms to the £275bn market for defined pensions, including new powers for the pensions regulator, and greater transparency on costs and performance from pension providers.
Of the £40bn the OFT says may be delivering poor value, £30bn is in old and high-charging schemes, while £10bn is in small schemes which are "at risk of delivering poor value for money due to low levels of trustee engagement and capability".Of the £40bn the OFT says may be delivering poor value, £30bn is in old and high-charging schemes, while £10bn is in small schemes which are "at risk of delivering poor value for money due to low levels of trustee engagement and capability".
Around 5 million people are saving into defined contribution plans, which are increasingly used by firms because the absence of guaranteed retirement payouts means they are cheaper to run than traditional final salary schemes. The government's auto-enrolment programme, launched in October last year, will see up to 9 million workers signed up to them over the next five years. Around 5 million people are saving into defined contribution plans, which are increasingly used by firms because the absence of guaranteed retirement payouts means they are cheaper to run than traditional final salary schemes. The government's auto-enrolment programme, launched in October last year, will see up to 9 million more workers signed up to them over the next five years.
However, the OFT found that employers may often lack the capability or incentive to choose which scheme offered the best value for money – a problem which will grow as smaller firms are brought into auto-enrolment.However, the OFT found that employers may often lack the capability or incentive to choose which scheme offered the best value for money – a problem which will grow as smaller firms are brought into auto-enrolment.
Where schemes were set up before 2001, it said they often had much higher charges than newer pensions, with annual management changes currently 26% higher on those sold before April 2001. Charges make a huge difference to a savers' final payout, with 0.5% annual management charge reducing the value of a savers' pension pot by around 11%, while a 1% charge can reduce the value by around a fifth.
It has reached agreement with the Association of British Insurers to audit the schemes and their charges, while the pensions regulator will assess which smaller trust-based schemes are not delivering value.It has reached agreement with the Association of British Insurers to audit the schemes and their charges, while the pensions regulator will assess which smaller trust-based schemes are not delivering value.
The Department of Work and Pensions (DWP) has agreed to consider whether new powers are needed to tackle the problem. The OFT has recommended the DWP also consults on improving transparency in schemes and preventing those with in-built commissions to advisers and high charges for employees who are no longer paying in from being involved in auto enrolment.The Department of Work and Pensions (DWP) has agreed to consider whether new powers are needed to tackle the problem. The OFT has recommended the DWP also consults on improving transparency in schemes and preventing those with in-built commissions to advisers and high charges for employees who are no longer paying in from being involved in auto enrolment.
The minister for pensions, Steve Webb, said: "This report outlines further important ways to help consumers, and we will act on its recommendations. The minister for pensions, Steve Webb, said: "This report outlines further important ways to help consumers, and we will act on its recommendations. In particular, we need to ensure those already in pension schemes are getting good value for money, and will be actively involved in the audit of pension schemes sold prior to 2001.
"In particular, we need to ensure those already in pension schemes are getting good value for money, and will be actively involved in the audit of pension schemes sold prior to 2001. "We will consult shortly on the full range of options to protect consumers, including minimum scheme standards, and further action on charges and charge transparency."
"We will consult shortly on minimum scheme standards, including further action on charges." However Tom McPhail, head of pensions research at IFA group Hargreaves Lansdown, said the measures for governing schemes outlined in the report were "weak" and would not help people become more engaged with their pensions.
He added: "No one looks after your money as well as you do, and the fundamental problem with the governance of workplace pensions is that someone else (your employer) is choosing your pension for you.
"Some employers do a good job but inevitably not all do. In the long run where we need to get to is to use the efficiencies of setting up group pensions through the workplace and then put individuals in control of their own retirement savings."
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