Will DC pensions be the next big litigation target in the UK?

For employers the advantages are clear: they are no longer shackled by benefits that cost far more than ever predicted. Instead the costs are known, quantifiable and don’t require an actuary to predict.

With such a large uptake in DC membership, the Pensions Regulator and Financial Conduct Authority have taken a keen interest in helping to ensure that member benefits are adequately monitored and protected, and for good reason too.

Those in the UK industry should start to wise up to the risks, not just to members, but to anyone who could be considered to have a fiduciary duty

The pensions industry moves slowly, money is ‘sticky’, and while consumers might be getting better at switching their electricity and gas supplier, moving pension assets continues to be fraught with difficulties, whether instigated by an employer or by the individual.

This lack of consumer pressure on providers and schemes means many DC pension arrangements have skeletons lurking in the cupboard.

Fiduciaries hesitant to switch

Of course, it can be challenging to lift the lid on legacy issues. The legislative and regulatory environment can hinder rather than help, but significant leaps forward have been made, such as the new regulations on pensions transfers.

However, there are still billions of pounds stuck in high-cost, low-performing investments. The reasons for this are many and varied, although usually, there is someone who can do something about it.  

What we see though is a reluctance by many with fiduciary duties to open the cupboard door and tackle the skeletons. The trouble is, doing nothing is just as much a decision as doing something – and the industry would do well to wise up to this.

If we look to the US, where litigation culture is ripe and it is often the employer with the fiduciary duty, “speculative lawyers are increasingly seeing the 401(k) cases as easy pickings”, legal practitioners have previously told the FT.

The arguments presented in the litigation cases vary, of course; sometimes cost is the focus and other cases deal with the selection of service providers and fund options.

Here in the UK, passive funds are often favoured in DC arrangements, which poses less risk to those with fiduciary duties – but the biggest problem here is legacy assets stuck in expensive and poorly managed funds.

Are UK trustees at risk of legal action?

Those in the UK industry should start to wise up to the risks, not just to members, but to anyone who could be considered to have a fiduciary duty.

Realistically, we are unlikely to see huge settlements for damages. Updated guidance from the Pensions Ombudsman has given an upper limit on redress for “distress and inconvenience” of £2,000.

But who would have thought a few years ago that huge swaths of people would be making a claim for being mis-sold payment protection insurance?

Pensions are a long-term investment and high charges and/or low returns can significantly impact the amount an individual has at retirement when compounded over a number of years. Doing nothing is going to become less and less of an option. The regulatory regime has been tightened, the barriers to moving assets are being removed and there are fewer excuses for not opening the closet door.

Natalie Flood is vice-president of DC and wellbeing at Redington