The OFT to investigate workplace pensions

The Office of Fair Trading (OFT) has launched a study into workplace pension schemes, looking into whether they give savers value for money.

Four million savers in the UK are currently signed up to a defined contribution pension scheme with their employers. This number is set to rise dramatically as auto-enrolment is fully rolled-out. By 2018 an additional six to nine million workers will join.

The annual contributions into workplace pensions will also increase by £11 billion by 2018, which is why the OFT is acting now to determine if these schemes are really in the best interests of savers.

OFT investigation

The main focus of this study will be looking at the price savers will need to pay for a workplace pension and the average size of the pension pot they can expect.

This includes evaluating how pension providers compete with one another, and how this may change over time. How much pressure there is on providers to keep charges low will also be investigated.

The study will also focus on how smaller firms will cope with auto-enrolment and the problems they may face when making pension choices for their employees. The OFT wants to establish how much help smaller companies will be entitled to when setting up new pension schemes.

Lastly, the study will look into the barriers savers may face if they want to switch pension schemes and how far employers will be focused on making sure their workers are getting the best deal.

Mary Starks, Senior Director for the OFT, says the UK workplace pensions market is set for rapid change and growth in the next six years and it’s important savers get a good deal.

“We want to take a look at the market now to ensure that providers are competing to offer the best possible deals, and that the choices made by employers mean that employees are saving into good pension schemes for their retirement,” she adds.

Over the next few months the OFT will be collecting information from various sources such as pension providers, advisers and employers. The study will be finished in August 2013.

Auto-enrolment

Auto-enrolment started last October, with employees automatically signed into a pension which both they and their employer contribute too. Right now it’s only being rolled-out in large firms but in the next six years it will move to medium-sized and then smaller companies.

The idea is to try to encourage workers to start taking more responsibility when saving for retirement. Everyone will be automatically enrolled if they are at least 22, earning more than £8,105 and under State Pension age.

Does the OFT study go far enough?

Danny Cox, spokesperson for Hargreaves Lansdown, says with a pension scheme the main factors to look at when deciding what kind of savings pot you’ll have in retirement is how much you put in, how long for and the kind of investment returns you get.

Therefore he thinks it’s vital the OFT also looks into these factors – and not just the costs – involved with workplace pensions.

For example, a 35-year old employee saving £200 a month until they turn £65 may amass a savings pot of £335,000, if there was 6% growth and 1% charges. If the charges go up by 0.25% then the end pot will go down to £321,447 - a loss of nearly £14,000.

Although this is a significant loss, Cox points out that if the saver had begun a pension a year earlier then the pension could be closer to £360,752, an increase of almost £26,000.

Putting away £50 a month more will also have increased the pot to nearly £418,000 – which leaves the pensioner £83,000 richer.

As such it's vital employers and employees have access to information about how much their pension could change when looking at a range of factors - and not just the pension charges.

Cox also points out that “pensions are no longer ‘high charge’” and it is possible to find cheaper ways to invest, such as through a low-cost SIPP which typically costs no more than 0.55% - so £5.50 a year for every £1,000.

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