FCA pushes work pension schemes to ensure charges are good value

Regulators are pressing workplace pension schemes to scrutinise costs more closely to ensure staff are not over-charged.

They propose tightening up rules on assessing value for money, including laying down standardised tests on charges and costs, investment performance and quality of service.

Some independent governance committees, which are meant to represent the interests of people with workplace pensions, ‘lack the necessary independence’ and are ‘ineffective’ at challenging providers, according to the Financial Conduct Authority.

The watchdog previously cracked down on rip-off pension fund fees after shock reports uncovered widespread exploitation of people trying to provide for old age. 

An audit published in December 2014 showed some workers facing charges of as much as four times the official recommended cost of 0.75 per cent a year. 

This led to previous offenders cutting fees to 1 per cent or less.

The FCA subsequently made fund management firms cough up full details of investing charges – including transaction costs and administration fees – to pension savers in a standardised format.

Auto-enrolment has seen a flood of people join workplace pensions in recent years, and many are likely to be unaware of what they are being charged. 

However, there is a 0.75 per cent cap on fees for those in ‘default’ pension funds, which workers are opted into unless they make active investment decisions about their savings.

Five years ago, the FCA forced employers running ‘defined contribution’ pension schemes, which take money from workers and their employer and invest it to build a retirement fund, to set up five-member independence governance schemes (IGCs).

The committees are meant to monitor and assess the value for money of schemes, and to challenge the pension providers which run them to make changes where necessary.

Final salary pension schemes, which guarantee workers a set income in retirement, were already overseen by trustees.

Today, the FCA said a review of IGCs between 2017 and 2019 found some were working well for members saving into workplace pension schemes.

However, it added that a lack of consistency in the operation of IGCs and ‘governance advisory arrangements’ – similar bodies run by third-party firms on behalf of pension providers – meant some savers may not be receiving value for money.

It is now consulting on whether pension providers themselves should have a direct responsibility for value for money alongside scheme governors. 

‘Some IGCs lack the necessary independence and were ineffective at challenging firms to ensure value for money for workplace pension scheme members.

‘Those IGCs which maintained independence from the firms whose pension schemes they had responsibility for delivered better outcomes for pension scheme members’

It added that GAAs were less effective at delivering meaningful improvements in value for money.

‘Over the period of our review we found there had been a small reduction in charges across all pension savings, although this cannot be directly linked to the work of IGCs and GAAs.’

Megan Butler, executive director of supervision for investment, wholesale and specialists, said: ‘Our separate review into IGCs and GAAs lays out the key lessons that need to be learned to ensure that workplace pension holders get a fair deal.

‘The FCA has carefully considered these findings and is asking firms that do not meet our requirements to make improvements.’

The watchdog proposes a simple framework for an annual value for money assessment process, covering charges, investment performance and service , and has issued a consultation paper asking for response by 24 September. 

What does the finance industry say?

‘Workplace personal pensions have flown under the regulatory radar for far too long,’ says Moira O’Neill, head of personal finance at online platform Interactive Investor.

‘They have become fat and complacent, relying on customer inertia, shiny branding and exit charges to continue to deliver poor customer outcomes at a high cost.

‘We hope this consultation shines a spotlight on an industry that has grown unchecked for far too long.

‘Too many workplace personal pensions are still shrouded in mystery and people need to be made much more aware of the poor value for money some workplace pensions schemes are offering – particularly the old ones.’

Kay Ingram, director of public policy at financial planner LEBC, said: ‘The review is correct in its findings that many IGCs do not have the independence to enable them to enhance value for money or drive for positive member outcomes.

‘Equally we believe that the findings relating to reduction in scheme charges for members have not been due to the emergence of IGCs but in fact have largely been obtained via procurement services through independent corporate consultants like LEBC.

‘We believe many employers do not apply suitable oversight to their workplace pension schemes and reliance on IGCs will not provide that oversight function for an employer to demonstrate they are taking the relevant actions to ensure members receive value for money.’

Laura Andrikopoulos, head of defined contribution governance consulting at Hymans Robertson, said: ‘Value for money has become a familiar term across occupational pensions so the ability to make these comparisons will be useful for the industry.

‘The move towards a standardised format to assess value for money is one that may well help drive greater independence of IGCs.

‘It is vital however, that with the introduction of any changes, focus is not lost on member outcomes, which is critical to the assessment of long-term “value”.

‘Value is not only about cost, but should be a holistic assessment taking into account the quality provided for that cost, levels of company contributions, and the ultimate outcome achieved through smart investment strategies and good retirement support.’