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Defined contribution workplace pension market study

Start date: 17 January 2013
End date: 11 February 2014

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Latest update 27 March 2014

The OFT welcomes the Government's announcement that it will be implementing measures, as recommended in the OFT's defined contribution workplace market study, to ensure that savers can benefit from stronger scheme governance, transparent and comparable charging information and pension charges that won't unfairly penalise savers.

The OFT considers these measures, in addition to the industry's audit of high charge and legacy pension schemes, are vital to ensuring that that all workplace pension savers can secure value for money in the long term.

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The audit of high cost and legacy schemes

The OFT is pleased to announce the appointment of the Independent Chair and Board members to oversee the audit of high cost and legacy defined contribution (DC) workplace pension schemes.

The OFT's report on the DC workplace pensions market (pdf 1.35Mb) published in September 2013 identified, amongst other things, around £30 billion of savings in old (pre 2001) and other high charging contract and bundled-trust pension schemes that may not be achieving value for money by the standards of modern DC workplace pension schemes.

As a remedy, the Association of British Insurers and its members agreed to undertake an audit of these schemes that will be overseen by, and report into, an Independent Project Board (IPB). The role of the IPB will be to agree the terms of reference for the audit, scrutinise the results and agree what industry-level actions are needed to address schemes not assessed as value for money.

The IPB's membership includes senior representatives from government, the regulators, consumer enforcement, finance and the OFT:

  • Carol Sergeant, Independent Chair
  • Michelle Cracknell, The Pensions Advisory Service 
  • David Hare, Institute and Faculty of Actuaries 
  • Bridget Micklem, Department for Work and Pensions
  • Nick Poyntz-Wright, Financial Conduct Authority
  • Joanne Segars, the National Association of Pension Funds Limited
  • Ed Smith, Office of Fair Trading
  • Doug Taylor, member of the Financial Services Consumer Panel, the EIOPA occupational pensions stakeholder group and NEST's Members' Panel
  • Otto Thoresen, Association of British Insurers 
  • Andrew Warwick-Thompson, The Pensions Regulator

The audit is scheduled to be completed by the end of 2014.

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Final decision - following consultation on the OFT's provisional decision not to refer the market to the Competition Commission

The OFT provisionally concluded that the legal test for making a Market Investigation Reference (MIR) to the Competition Commission (CC) was met. However, in light of the fact that there were steps in place to address the competition concerns that we identified, we provisionally concluded that an MIR would not be appropriate in this instance and consulted on this provisional decision between 19 September 2013 and 31 October 2013.

Having carefully considered the responses to the consultation, the OFT remains of the view that although there are a number of features of the DC workplace pension market that satisfy the reference test, the package of remedies being developed are likely to impact the persistence of the features identified. Accordingly, the OFT will not be making a MIR to the CC in respect of the DC workplace pension market.

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Purpose of the study

In January 2013 the OFT launched a market study to investigate whether the defined contribution (DC) workplace pension market is working well for consumers.

By 2018 up to nine million workers will be automatically enrolled into a DC workplace pension scheme by their employer. As a result, the sector will experience a major structural shift in a very short period of time. This will be driven by a sharp increase in the number of employees saving for their retirement through workplace schemes and a significant change in the profile of employers who choose a workplace scheme on their behalf.

The OFT therefore considered it timely to consider whether competition between providers is set up to work in the best interests of current and future savers to deliver low cost, high quality pension schemes.

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OFT findings

On 19 September 2013 the OFT published the findings from its market study (pdf 1.35Mb) into DC workplace pensions.

Overall, the OFT found that competition alone cannot be relied upon to drive value for money for all savers in the DC workplace pension market. This arises from the combination of two factors:

  • The complexity of the product. The complexity makes it difficult to make the right choices about pensions, for individual savers and employers. 
  • Employers, who have the responsibility of deciding which pension scheme to choose for their employees, may often lack the capability or the incentive to assess value for money.

The OFT has found that these weaknesses have already created a risk of savers losing out in two parts of the market.

  • Old and/or high charging schemes. Around £30 billion of savings in old and/or high charging contract and bundled-trust schemes may not be value for money.
  • Small trust based schemes. Around £10 billion of savings in smaller trust-based schemes are at risk of delivering poor value for money due to low levels of trustee engagement and capability.

In addition, the OFT is concerned that similar problems might occur in the future without measures to improve the governance and scrutiny of pension schemes on behalf of savers and the quality of information available. 

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OFT recommendations

To improve this market, the OFT secured agreement with the industry and the Pensions Regulator to important steps in tackling these problems:

  • Dealing with old and/or high charging schemes. To address the OFT's concerns about old and high charging contract and bundled-trust schemes, the Association of British Insurers and its members have agreed to an immediate audit of these schemes, aimed at ensuring savers are getting value for money. This will be overseen by an independent project board.
  • Dealing with issues with small trust based schemes. To address the OFT's concerns about small contract based schemes, the Pensions Regulator (TPR) has agreed to take rapid action to assess which smaller trust based schemes are not delivering value for money. The Department for Work and Pensions (DWP) has agreed to consider whether the TPR needs new enforcement powers to tackle the problem. 
  • Improving governance. To address the OFT's concerns about lack of independent scrutiny of contract based schemes, the ABI has agreed that their members will establish independent governance committees. Committees should recommend changes to providers and escalate issues to regulators where they see risks of poor outcomes for savers. We recommend that the key elements of this governance solution should be embedded by the Government in a minimum governance standard that will apply to all pension schemes.
  • Improving the quality of information available on costs and charges. The OFT recommends DWP consult on improving the transparency and comparability of information about the charges - including whether providers could disclose a single Annual Management Charge and investment transaction costs - and quality of schemes in order to make employers' initial choice of scheme easier.
  • Preventing future risks of detriment. The OFT recommends DWP consult on preventing schemes being used for auto-enrolment that contain in-built adviser commissions or that penalise members with higher charges when they stop contributing into their pensions.

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Related documents

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Senior Responsible Officer: Nisha Arora (
Project Director: Ed Smith (

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