The Association of British Insurers will audit contract and bundled schemes at risk of being poor value for members, following the Office of Fair Trading’s investigation into the market.
The ABI will audit all workplace pension products sold before 2001 and those sold with charges equivalent to 1 per cent annual management charge after that date.
This will be to establish the charges and any benefits associated with them by December 2014, according to the report released by the OFT last week.
The watchdog launched a study in January to assess whether the defined contribution workplace pensions market offered good value for money, in light of auto-enrolment.
One obvious inclusion will be how regularly schemes are reviewed by governance committees
Audits will be carried out by an independent project board comprised of representatives of the Department for Work and Pensions, the Pensions Regulator and the pensions industry, and will be independently chaired.
The OFT had been expected to recommend a cap on charges but concluded that the numerous configurations of charges for legacy schemes and the fact that some provide benefits such as guaranteed annuities, meant audits were preferable.
Contract-based governance
The report also recommended the government set minimum governance standards for all schemes to ensure a consistent level of scrutiny.
The ABI and its members have agreed that all providers of contract-based and bundled schemes will embed independent governance committees, which will report any value-for-money issues to the provider’s board.
If the board fails to act on these recommendations to the committee’s satisfaction, the committee may make the matter public, inform the employer and refer it to the relevant regulator.
Nigel Aston, head of UK DC at State Street Global Advisors, said he anticipates more schemes expecting asset managers to be responsible for governance and ensuring funds remain fit for purpose, if minimum standards are introduced.
“Rather than an external agency, asset managers will be expected to make sure that those funds remain fit for purpose,” he said.
Minimum governance standards will cover contributions made to schemes, investment performance, charges and shopping-around arrangements, said Laith Khalaf, head of corporate research at Hargreaves Lansdown.
“One obvious inclusion will be how regularly schemes are reviewed by governance committees,” he added.
The regulator and DWP reviews schemes once every three years, but Khalaf said it should be annually.
The report also states that white-labelling or blended defaults may be a solution to the inflexibility of contract-based schemes.
However Khalaf said while to a certain extent this approach could be a solution, it would also incur higher charges that would ultimately be passed on to members.
“Being in the right investment strategy in the long term has to be the right thing,” said John Foster, principal consultant at Aon Hewitt.
Schemes should consider the benefits for members in proportion to cost, he added.
Reporting to the regulator
The OFT recommends trustee-based schemes report basic data to the regulator so they can assess the value for money of the scheme. This data should help identify schemes at greatest risk and make regulatory activity better targeted.
Andrew Warwick-Thompson, executive director for DC, governance and administration at the regulator, said it is evaluating the best method for schemes to report this information. “We are considering whether this should be included in the annual scheme return, or perhaps in the audited annual scheme accounts, or alternative reporting media,” he said.
“We are also in discussions with our partners in the DWP about what additional powers and resources may be required to achieve effective measurement of value for money and to address the issue of those schemes which cannot or will not reach the required standards,” Warwick-Thompson added.
