23 September 2013
NEST charging structure may be responsible for failure to recommend a charge cap – NEST would not comply with a 1% cap!
The long-awaited OFT report into pension scheme charges has finally been released – but its recommendations are disappointingly weak in terms of consumer protection.
The OFT has done an excellent job in highlighting the excessive charges on older (particularly pre-2001) pension schemes but it has shied away from recommendations that would quickly bring them down.
It did not propose a widely-expected cap on pension scheme charges. This would have sent a clear signal that rip-off fees must end, but was considered too difficult to introduce in practice. Instead, it is leaving it to the insurance companies and pension providers themselves to ‘audit’ old schemes and check value for money and to establish independent governance committees to watch out for poor practice. It is hardly likely that customers will be suitably reassured by this.
The failure to recommend a cap has disappointed many. However with the charging structure of NEST perhaps it was never likely that a cap could work. Currently, NEST imposes a hefty 1.8% initial charge on all contributions, which would be way in excess of any likely cap. For someone who is enrolled at an older age, the effect of the 1.8% charge is likely to leave them facing overall costs that are unfairly high. Unless NEST’s charging structure is overhauled, perhaps it is never likely that a cap will be a realistic option.
The OFT says all the right things – recognising that, as auto-enrolment extends pension coverage to millions more workers ‘it is vital that they save in schemes that deliver good value for money’ and stressed the importance that ‘measures be implemented rapidly’. However, it is not actually proposing new measures that will make much difference in practice.
There are five main recommendations:
1. ABI to audit old schemes: That the ABI (Association of British Insurers) has agreed to work with the Government to audit old-style schemes to single out poor-value plans, improve transparency and identify whether they offer value for money. An audit will not stop schemes charging too much and is not going to improve the position of those stuck in such schemes who already know they have high fees.
2. ABI to set up independent ‘governance committees’ to check value for money: The ABI is also urged to ensure that each insurance company establishes an independent ‘governance committee’ to check whether schemes offer value for money, recommend any changes and report poor practice to the Pensions Regulator.
3. tPR to ‘assess value for money’ of small trust schemes: The Pensions Regulator is urged to take ‘urgent action’ to ‘assess’ the value for money of small trust based schemes. The OFT particularly highlighted the problem of excessive charges legacy contract-based or bundled-trust schemes, which have around £30bn of people’s pension savings, plus a further £10bn in small trust-based pension schemes, where nobody is ensuring charges are reasonable. Assessing these schemes hardly constitutes ‘action’. The customer charges will not be affected by an assessment. The DWP is urged to consider whether it needs new enforcement powers to ensure charges can be reduced.
4. DWP should consult on improving transparency of charges and quality: The OFT recommends that the DWP should consult on improving transparency of charges and helping customers compare information so they can assess schemes charges and quality. Again, this is not going to ensure charges are reduced.
5. Ban Active Member Discounts, consultancy charges and maybe adviser charges: The report recommends a ban on the practice of so-called Active Member Discounts which are really just higher charges for members who no longer contribute after leaving their employer. It also suggests banning adviser and consultancy charges, whereby employees pay fees for advice and services given to their employer, while the employer actually chooses which scheme to use. These measures could help improve customer value.
Even after the OFT’s damning findings of bad practice and high charges, customers will continue to lose out. The interests of the industry have prevailed. It is true that most schemes are better value nowadays, however companies have too often kept charges opaque and hidden the true costs of their products.
Meanwhile, millions of workers will be automatically enrolled into company pension schemes where there are inadequate controls and safeguards on the charges they will face. Even the Government’s own taxpayer-funded scheme is failing to operate in the customer interest on this issue.
Who is protecting the customer?