FCA and DWP hit out at ‘poor value workplace schemes’ and IGCs

workersMore than 330,000 members of workplace pension schemes are still suffering AMCs in excess of 1 per cent despite the FCA and DWP’s efforts to pressurise providers to reduce their costs following the 2013 Office of Fair Trading market study.

A DWP/FCA joint review of industry progress in remedying poor value workplace pension schemes published today has found that while the majority of the 1.5 million members suffering high charges have now been moved to AMCs of either 0.75 or 1 per cent, around a sixth remain affected by high charged. It found charges on the 16 per cent of the targeted AUM in contract-based schemes, representing approximately 243,000 customers, and 15 per cent of the AUM in trust-based schemes, representing approximately 85,000 customers had not been properly addressed. The FCA and DWP say the problem relates to a small number of providers.

The FCA and DWP say a small number of providers have only given limited consideration to qualitative factors and in the final agreed actions with IGCs or trustees. Consequently, these assessments may be limited and may result in valuable customer benefits not being fully considered from a value for money perspective.

The review also found that most providers had not fully reviewed the impact of transaction costs in their value for money assessments and in most cases had no immediate plans for a fuller review of these. The regulators had expected providers to have made more progress in this area. Providers using in-house investment management services have been singled out for particular criticism.

IGCs have also been criticised as not playing a sufficiently proactive and rigorous role in driving providers to agree robust actions more quickly. Where IGCs have agreed temporary actions or actions which depend on customer responses, some IGCs appear to have failed to challenge the provider and agreed an alternative solution for customers who do not engage or to have considered whether proactive action to reduce charges could have been taken notwithstanding any restrictions within the scheme contract.

The review has found that the independence of some IGCs may be compromised due to its composition or a strong senior management presence at meetings which ‘could impact the IGC’s ability to independently assess and challenge the provider’s actions to address the IPB recommendations’.

The review also found that where providers have elected to use a Governance Advisory Arrangement (GAA), there is insufficient evidence that engagement, interaction and challenge between the GAA and providers has been present.

The FCA and DWP say they will engage urgently with these providers by January 2017 at the latest to agree ‘robust actions’.

In 2013, the Office of Fair Trading (OFT) undertook a market study into both contract and trust-based4 defined contribution (DC) workplace pensions. It identified an estimated £30bn of customers’ money in schemes with charges at risk of delivering poor value for money.

The Association of British Insurers (ABI) established an Independent Project Board (IPB) 7 to oversee an audit of these schemes. The IPB undertook a comprehensive assessment of charges, using data provided by pension providers, and found that approximately £25.8bn of AUM and approximately 1.5 million customers were potentially exposed to costs and charges of more than 1 per cent, split £24bn in contract-based schemes and £2bn in trust-based schemes.

For a further 16 per cent of the AUM for contract-based schemes – approximately 189,000 customers – and 21 per cent of the AUM for trust-based schemes – approximately 42,000 customers – a small number of providers have implemented actions which rely on a response from another party such as the individual customers or the trustees, such as where consent is legally required by the terms of a contract when moving large groups of customers from one investment platform to another. When fully implemented, these actions will reduce the costs and charges to 1 per cent or below.

FCA chief executive Andrew Bailey says: “Pension providers look after the savings of millions of customers and it is vital that they provide good value for money.  We have seen good progress towards the goals that the IPB laid out but this is not the end of the story. Firms should continue to work to ensure that value for money is being consistently delivered.

“There is still more to do so we will be contacting the providers who have not yet taken satisfactory actions to remedy poor value schemes and we expect them to act swiftly to ensure good value for customers.”

Pensions minister Richard Harrington says: “I am pleased that more than a million pension savers will benefit from our push to curb excessive charges in legacy schemes. Nevertheless, some people are still at risk of high charges, so I shall be seeking assurances from the providers of those schemes, that they will be taking steps to resolve this issue.”

AJ Bell senior analyst Tom Selby says: “Clearly it’s good that some progress has been made on costs and charges in workplace schemes. However, it is worrying that three years on from the OFT’s damning report into workplace pensions – and despite the introduction of a 0.75 charge cap on default auto-enrolment funds in April 2015 – over 300,000 members may still be in poor value-for-money schemes.

“The DWP and FCA are right to focus on this part of the market and should seek reassurances from providers that they will address the issues raised as a matter of urgency.”