MSE News: Pension charges under the microscope in OFT investigation

One easy win: mandate that employees must have the ability to transfer money between DC pensions no less frequently than once a year and with a capped charge of no more than £25 from the scheme the transfer is coming from. Then employees can move out of any bad deals easily and cheaply, however bad the scheme their employer offers or offered. And that helps to provide an incentive to offer deals that won't provoke regular transfers out by employees.

NEST not to be an exception to this - it offers a poor range of investments and charges that are not low compared to the best available in the marketplace.

Mandating transfers being allowed to be "in specie" without being forced to sell and re-buy investments would also be helpful, at no higher cost than a transfer in cash. Again, a tool to make it harder to lock people in to products that don't offer good value. Exceptions: investments that aren't available in the general market - so a dedicated fund only available within a particular pension wouldn't have to be in specie, but say an investment in Invesco Perpetual High Income fund or one of the many open market FTSE All Share Index tracker funds would be.

Providing information to a consolidated reporting service would also be useful, since multiple pensions are normal but it's not always easy to get an overview of them all. This helps with that overview and with keeping people aware of all of their pensions, potentially encouraging better engagement with them. It's also a good tool to facilitate transfers.

it's not DC but help for people with smaller pots in DB plans and section 32 arrangements would be good. Say a transfer value up to £5,000 or perhaps £10,000 being able to be transferred into DC or any other scheme without IFA sign-off. This is because the cost of the advice causes a loss greater than the possible loss due to a transfer and leaves people stuck with small pots that could be better consolidated. This could be helped by a mandated requirement to provide a plain language summary section to say whether the plan has benefits above the current normal DC level - say guaranteed annuity rates or larger than normal lump sum percentage. Say:

"Cautions: There are no mandated cautions before transferring this pension"
"Cautions: This is a defined benefit pension and is likely to pay more than defined contribution pensions. You should not transfer this pension unless you are confident that the ease of management or other benefits make it desirable for you to do it"
"Caution: This pension has a guaranteed annuity rate of (insert details)"
"Caution: This pension has a lump sum percentage of x which is higher than the normal 25% for defined contribution pensions. You will lose this extra lump sum capability if you transfer"

Or in summary: help people to have and take control of their pensions so they can be more engaged if they want to be.

Transfers sound great. Our GPP provider, Friends Life, has said they will not let me transfer funds out of the scheme (either partial or total) and then continue with personal and company contributions to the FL scheme.

Here are the OFT announcement and FAQ page. The study is intended to cover workplace schemes including those used for auto-enrolment. Group personal pensions are explicitly included.

A major troublesome aspect of the market is the lack of choice for consumers, because it is the employer that selects the pension and there is no requirement that employees be able to transfer out and continue to remain a member. This leaves the consumers paying the costs but not being able to change provider if cost, service or investment choice are not as good as available elsewhere in the market.

Correct me if I'm wrong but isn't the whole way the charges are levied part of the problem? If they get a set percentage just for managing the fund what mechanism to spur them to grow the fund?

If however their fee came out of any growth then there would be an incentive. Otherwise the punter is simply gambling that they might benefit from the industrys expertise, equally they might not but they pay either way...

davidgmmafan wrote: »

what mechanism to spur them to grow the fund?

Investing is a funny beast.

Those who've been doing it for a few decades generally come to recognise that once you've eliminated the most egregious mistakes (usually lack of diversity, attempting to time the market, and letting asset allocation get seriously unbalanced) then additional efforts don't lead to additional rewards.

Studies have been done where professional investment managers were offered various incentives to perform better, and while they could tweak their style to generate larger returns for themselves, returns for investors didn't benefit.