A clean bill of health or dynamite under the business model of life offices? The OFT’s inquiry into workplace pensions could have far-reaching ramifications. John Lappin investigates
The Office of Fair Trading is a very powerful organisation within the UK’s political and regulatory set up. If it believes a market is seriously malfunctioning it can recommend that the Government brings forward legislation. Its examination of workplace pensions may start with provider competition, charges, barriers to switching and advice received by small firms, but the reality is it is unlikely to leave any stone unturned. It is currently meeting trade bodies, providers and pension experts to flesh out the scope of its inquiry into defined contribution pensions with a report due in August.
Iain Anderson, chief corporate counsel for public affairs firm Cicero Consulting, says: “When the OFT decides to look at an area, it usually has wide policy ramifications. When they looked at home credit or motor insurance, the end point has been much wider than the starting point. While this is around the shape of the market, at the same time the chance for this being much wider is there. The footprint of OFT is significant. It will be noisy and it will be newsy, which is not the case if say the Department for Work and Pensions looks at an issue.”
Simon Tyler, legal director at Pinsent Masons says the inquiry has three strands, covering access to advice for smaller schemes, charges and changing market dynamics resulting from auto-enrolment.
He says: “Something dramatic is happening due to auto-enrolment. The question is whether there is going to be a relevant number of schemes for people to choose from. My impression is that there is a competitive market for auto-enrolment now, but will it be the case when you are looking at smaller businesses, though we know Nest was set up in recognition of this. The OFT will be looking at whether there enough of a range or even too much. Does the OFT want consolidation? It implies less competition but there are economic theories out there that say too much choice is bad and a smaller choice of better quality products may be better.”
Hargreaves Lansdown head of pension research Tom McPhail suggests the review’s key focus is likely to be around charges.
McPhail says: “There is a widespread preoccupation with the question of pension charges and whether investors are getting good value for money. Until that question is adequately addressed and satisfied, this widespread disquiet will continue to undermine people’s confidence in pensions. One way or another, resolving this question would be a good outcome,” he says.
“Generally pension investors do not want to know the minutiae of what they are paying. They do want to know what the top line charge is and if it is fair. If it comes from the OFT, the Labour Party, or the private interest campaigns, if we can to point to what good looks like and provide investors with a way of understanding if it is good, quickly and easily, then, well, that will do.”
LCP principal Andrew Cheseldine says that the independence and status of the OFT could actually prove to be very beneficial on the charges issue.
“The OFT doesn’t just look at things from the point of view of costs, it can look at things from the point of view of value as well. Someone who is independent of the day to day stuff on pensions, i.e. not DWP, ABI or NAPF can cut through some of the verbiage.”
He says that many providers are doing their level best to keep charges down, but there has to be more of an understanding of just how much regulatory oversight and taxation can cost. He says auto-enrolment brings in more money but also more costs, such as opt out costs and services such as telephone help lines.
But Cheseldine suggests the inquiry has got its timing right, because it is later stagers where the costs may be more of an issue.
“I would argue that most large employers with large schemes get good value for money – they are set up to demand that. They fight quite hard to keep their charges down. The potential for things going wrong comes at the sub 1,000, and particularly the one or two hundred employee level. I can see justification for relatively high costs where someone is offering a lot of services and face to face meetings, but in practice I am not convinced that is always the case and I am nervous the employers could get the sharp end of the stick,” he says.
The OFT report may help distinguish the good from the bad.
“Most providers should not have a reason to be concerned. The ones we use provide good value terms. The OFT may say we have looked at this and 80 or 90 per cent of the time charges are perfectly reasonable, and if they identify where the 10 or 20 per cent aren’t reasonable, that is good because we can do something about it. We beat ourselves up about charges. They are not as bad as many of the headlines. This is an opportunity to get the message across, because the OFT will not put any spin on it. It will say these are the facts,” he adds.
Premier director Martin Thompson takes a similar view on the subject of competition. “In the assured market, there is pretty intense competition for quality business. If we look at stakeholder charging, it was 1 per cent, it has come down 0.5 per cent and now, clean of commission, 0.3 per cent. But it is all about making sure there are enough providers available to provide competition. You can’t expect stiff competition for low margin business in auto-enrolment.”
Thompson therefore takes a very positive view of the role of employers and governance. “I think there are very few medium and larger employers that aren’t seeking value for money DC schemes. I would be surprised if the review found something different. An employer has got much more buying power than consumers to drive down charges. Employers we work with have got good governance and a key part of that is to make sure they are getting value for money from that market. If you have a finance director and employee representatives on a committee, you can drive down charges,” he says.
Some consumer advocates are not quite so positive about the strength of the employer’s position.
Financial Inclusion Centre director Mick McAteer says: “They are looking at costs but also switching barriers. It is a classic competition approach. What would have better is if they had looked at the fitness for purpose of DC pension schemes. The essence of a pension scheme is to provide consumers and investors with a reasonable risk adjusted return at a reasonable cost. You can’t do that if you just look at the cost and not at how well the fund managers are performing and delivering on their core objectives.”
Ian Neale, director of Aries, takes a very different tack and says a review needs to segment the market.
“There is a considerable political bandwagon rolling though I am sure the OFT has stronger grounds. It behoves any responsible investigator to become aware of all the factors. You have to properly segment the market to distinguish the legacy zombie funds from actively marketed funds. When politicians bring forward the example of charges of up to 3 per cent, usually on investigation, they are referring to closed book arrangements. If you propose those charges are unfair you are faced with unwinding an existing contract and the closed book providers will fight very hard. But excluding the legacy funds, you will be able to show a steady downward slope of the graph on charges. I would be sceptical there is much more scope for reduction except in one respect. Politicians might themselves have contributed to higher charges with the compliance burden that has been growing steadily.
Some commentators have also pointed out that the competitive landscape is skewed somewhat. McPhail says: “You have the peculiar issue of the agent principle relationship in workplace pensions where the competition rule break down a little bit, because the purchaser is not the end user,” McPhail says.
McAteer says that increasingly the attitude of regulators is not just to look at consumers but financial users and this can include employers.
He says: “There is a growing recognition that just because they are employers, it doesn’t mean they are vulnerable to predatory practices and sub optimal decisions. In addition, the regulators in Europe and the UK are looking at whether financial ‘users’ are getting a good deal. It is implicit in the new Financial Service Act. It has to work for the whole supply chain, employers are only one step up the supply chain.”
Could the review spell bad news for another part of the supply chain – the advisers?
Thompson says: “If advisers look to some of the old commission structures with 1 per cent AMCs and promised advice to members and not delivering what they promised which is unfortunately quite common, if they pick on one or two of those there could be some bad headlines. It isn’t representative of the industry but it could lead to a knee jerk reaction.”
But what of adviser remuneration and the OFT’s attitude to pre-January commission and post-January consultancy charging?
Pensions Management Institute technical consultant Tim Middleton says: “There has been a lot of uncertainty about pricing and adviser remuneration and the onset of RDR. If it can provide some clarity this is a good opportunity.”
But Syndaxi Financial Planning managing director Robert Reid takes a wholly different view of the implications.”I think this is the equivalent of a nuclear bomb. It could blow legacy apart. It blows consolidators apart, it messes things up for the zombie companies but it really messes things up for life offices. They will have been booking some of the profit for years that haven’t occurred yet. If they lose their ability to impose penalties, it will be like snow off a dyke because people like me will move all the stuff we haven’t been able to move. I can legitimately move it with the OFT at my back. It could be a bonanza for some intermediaries and it could be the end for some intermediaries. At times, I think this is bigger than the RDR.”
Clean bill of health or nuclear bomb? We’ll know by August.