Nick Salter, President-elect of the IFoA comments on the OFT's report on DC workplace pensions market
“Yesterday’s report by the Office of Fair Trading (OFT) into the defined contributions (DC) workplace pensions market is a welcome consideration into whether or not these types of pensions offer their members value for money. We were pleased to note that the OFT did not equate value for money as cheapest is best. Although charges are significant they are one of several factors which affect the member outcome. As the OFT noted, the design of a scheme, the execution of investment strategy, investment performance, administration, communication with members and good governance are all vital elements of a well run scheme, albeit not as visible to members.
“The question this report does not address, and one we believe is an equally valuable question, is that of outcomes and what constitutes a ‘good outcome’. This is ultimately what scheme members desire. An important factor within the provision of a ‘good outcome’ is the conversion of a pension pot to an income for retirement. There is presently a restricted supply of suitable products available to allow a competitive market to produce these desired outcomes. Ways of encouraging innovation from product providers to offer appropriate contracts should be considered and the IFoA looks forward to working with other bodies to investigate ways in which this could be achieved.”
Active Member Discounts (AMDs)
“AMDs may have been designed to protect the interests of the majority of pension scheme members, but in today’s world few employees work for one employer for the entirety of their working lives and AMDs are now less appropriate than anticipated at the outset. The OFT's call to remove AMDs would bring workplace DC schemes into step with the realities of workplaces.”
Improving DC Workplace Scheme Governance
“The OFT correctly highlights the importance of good governance as one of five key factors that should be addressed by a pension scheme if it is to offer good value for money for scheme members.
“The recommendation of a minimum level of governance is one way to address the breadth of governance standards that presently exist in the ever increasing market of UK DC workplace pension schemes. However the introduction of a standardised minimum level of governance may introduce its own problems as there is a risk that companies will aim for the minimum level necessary. With such an approach the company specific considerations for each group of members’ best interests could be lost.
“The IFoA believes that the presence of a governance committee that is independent, transparent and accountable and which: engages with scheme members; demonstrates consistent professional oversight; and is empowered to make decisions and/or recommendations regarding members’ best interests, is the most important feature of good governance. Principles based legislation would set a standard for this.”
Improving the transparency and quality of information on charging
“The report has clearly found that DC workplace pensions’ charges are complex and at best opaque. The creation of standardised reporting of charges would address many of these concerns. We are pleased to note that the OFT does not believe that cheapest equates to best for pensions and that a charges cap, if introduced, could bring with it a number of unintended consequences that may not be in the best interests of scheme members.”
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The IFoA is an independent chartered professional body, with over 25,000 members located and working around the world. Our members advise the public and private sectors in areas that include pensions, insurance, health and care, finance and investment and risk management. The IFoA does not have a lobbying position and seeks to provide evidence based comment that will inform the debate.
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Editorial notes:
About the Institute and Faculty of Actuaries
1.Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues
2.Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.
3.Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.
4.The IFoA is available to provide independent expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.
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