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.
In a report published today – Caveat Venditor, or ‘seller beware’ – the report’s authors 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 Pensions Institute 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.
The report also found that schemes with dynamic asset allocation strategies such as large multi-employer schemes and consultant-designed schemes with a 0.5 per cent TER produced the best investment outcomes across members.
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.”
Professor David Blake, director of the Pensions Institute, says: “Fortunately there is time to address the problem of old high-charging funds, which for historic reasons are still widely used in the smaller employer market. These employers are not required to introduce auto-enrolment immediately but many companies will need to be prepared by mid- to late-2013.
“This report recommends the introduction of a kite-mark code that can help these employers find value for money schemes – and this is especially important if the employer is considered uneconomic (‘polluted’ in the industry’s language) for the advisory and provider market. A clearly signposted kite mark website for good quality value-for-money schemes – available to all employers, irrespective of their size and employee profile – would facilitate fair and equal treatment for all private sector employees, irrespective of how much they earn and the company for which they work.”
Chris Daykin, trustee director of Now: Pensions 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.”
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.”
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. In a competitive market we expect that efforts to deliver improving value for customers will remain a key measure of success.
“Pension providers and trustees also have a duty to ensure that the default option offered to workers is competitively priced, and the Department of Work and Pensions has the ability to cap charges if they are too high. The ABI continues to work with both the FSA and the Pensions Regulator to ensure that charges and costs are disclosed consistently to employees across all pension schemes in order to achieve greater transparency for workers who are automatically enrolled.”
Tom McPhail, head of pensions policy, Hargreaves Lansdown says: “The report makes some rather hyped up claims regarding pension charges and seems to ignore the recent DWP research which shows that average pension charges for workplace pensions are now below 1 per cent. We believe the Pensions Institute report overstates the risk of workers being auto-enrolled into very high charging legacy pensions.
“We are concerned that the Pensions Institute so readily dismisses investment performance and good member engagement as factors affecting pension payouts, it also fails to address the importance of employers providing their employees with an effective shopping around process at the point of retirement.
“The report calls for a price cap on group pensions of 0.5 per cent. We believe that this would stifle innovation, undermine member service and communication and ultimately it would lead to poorer member outcomes.”