The Pensions Institute’s Caveat Venditor report contains much for the corporate pensions specialist to consider. John Greenwood reports
A call for far greater scrutiny of legacy schemes that will be populated with new members, the identification of an RDR-caused advice gap in the small employer section of the market, a call for regulation of corporate advisers and criticism of the new trend towards consultant-providers are all included in a hard-hitting report from the Pensions Institute.
A kite mark should be introduced for employers without existing active schemes or those with expensive old schemes to fulfil their auto-enrolment obligations says the Pensions Institute’s Caveat Venditor or ‘seller beware’ report.
The report, by Debbie Harrison, David Blake and Kevin Dowd of the Pensions Institute, includes a call for a central website to direct employers without advisers towards kite-marked pension schemes that had charges in the region of the 0.5 per cent long-term charge of new multi-employer schemes that have recently come to the market.
The report says the kite mark is needed for two key areas – greenfield sites such as those smaller employers who have no active scheme at all for employees and existing high-charging schemes established in the 1990s and early 2000s who are set to be populated with many new members as a result of auto-enrolment.
It found some of these legacy schemes have TERs of as much as 3 per cent, six times higher than the better value schemes on the market. Auto-enrolment into these older schemes should not be permitted, the report argues.
Tim Jones, chief executive, Nest says: “The report by the Pensions Institute shows quite clearly that members are right to be concerned about the impact of high fees on their pension pots. The report also identifies the elements of a well-designed DC scheme, which looks very much like Nest. Low charges, a broadly diversified investment strategy, strong risk management and being run as a trust are all absolutely important to provide the kinds of outcomes that our members want for their later lives.
The report says that for a number of providers, there is a lack of clarity over charges and what precisely is included in the TER. The report says: “Our research encountered examples of what can only be at best described as ‘disingenuous practices’ in respect of charge and cost disclosure on the part of some providers and advisors. These unfairly distort competition and strongly influence the ‘choice’ of schemes employers purchase.”
Stephen Gay, director of life, savings and pensions at the ABI says: “The cost for managing pensions has fallen over the last ten years, according to ABI research the average default fund charge for existing schemes is 0.77 per cent annually. This is even lower for those schemes set up for automatic enrolment, charging on average 0.52 per cent. And the Department of Work and Pensions has the ability to cap charges if they are too high.”
At last month’s NAPF conference Aviva was one provider that pledged not to put members into what Steve Webb described as ‘dodgy old schemes’, drawing plaudits from the pensions minister.
Chris Daykin, trustee director of Now: Pensions, which sponsored the report, says: “’Caveat Emptor’ or ‘let the buyer beware’ – the normal assumption that applies to the way financial services products are purchased – simply does not work for auto-enrolment because the buyer is the employer but the real customer – who is passively auto-enrolled – is the employee. As the report states the “customers” are therefore “buying blind”. Caveat Venditor represents a more appropriate principle for members of auto-enrolment DC default funds, because, as the report concludes – ‘let the seller beware’ – puts the onus on the seller to ensure its product will do what it says on the tin: to produce a lifetime income in retirement that is fair value relative to the contributions paid.”
Doubtless less welcome to the ears of some advisers is the call in the report for corporate pension advisers to be regulated in the same way as individual IFAs. The report says corporate intermediaries should be regulated because employers, particularly in the smaller company market, cannot be regarded as informed institutional purchasers meaning their decisions can result in unacceptably high charges for their employees.
The report describes the exclusion of corporate intermediaries from regulation as a ‘loophole that leads to member detriment’. It says the FSA and from 2013, the new Financial Conduct Authority (FCA) – should regulate advice to employers in the same way in which they regulate advice to individuals.
The report also attacks consultants who have entered the DC market as scheme providers, constructing their own scheme using one or more asset managers for the default fund and one or more life offices for the platform.
The report says: “It is not clear if consultant-providers act in this capacity as discretionary asset managers, restricted-advice IFAs, or both, but in practice the difference between ‘independent’ and ‘restricted’ in these cases appears to be blurred, as is the boundary between ‘consultant’, ‘provider’ and ‘asset manager’.” Ministers and regulators will doubtless be watching this space.