Improving governance and best practice in workplace pensions - Work and Pensions Committee Contents

4  Transparency and the effectiveness of self-regulation

62.  This chapter explores the role that communications, transparency and self-regulation by the pensions industry can play in aiding employers to understand the potential impact that saving in particular pension schemes and funds could have on their employees' retirement income.

Transparency of costs and charges

63.   Many witnesses believed that the problems associated with high costs and charges are exacerbated by the way in which providers communicate charges to members.[62] The form in which costs and charges are currently presented by providers is not sufficiently transparent to enable employers to understand the effects that charges can have on the size of their employees' pension funds. Trade bodies, Government and other stakeholders have been putting pressure on pension providers to reduce charges and provide more transparency about all of the costs and charges associated with their pension scheme.[63]

Engaging with employers

64.  Employers' understanding of the level and range of charges levied on their employees by pension providers is currently low, although very large employers tend to have a better understanding than smaller employers. A survey of employers showed that 38% did not know the level of their company pension scheme's Annual Management Charges (AMCs). Among small employers (with 100 employees or less) the proportion was even higher, with around 50% unaware of the level of their scheme's AMC. This is particularly concerning because SMEs are likely to be charged higher AMCs by their pension scheme provider.[64] The NAPF said that awareness among micro, small and medium sized businesses was poor, particularly about active member discounts and flat rate charges. Indeed, some micro employers "assumed that the charges being discussed would actually be applied to the employers as opposed to the pension scheme members".[65]

65.  EEF believed that charging regimes in pension schemes were currently a "major barrier to delivering good pension outcomes" and that the lack of knowledge and understanding among employers about charges and their effects explained why pension providers have been able to continue charging high amounts. EEF argued that employers are not equipped with the necessary tools to "solve the problem" of high charges because they often need to rely on advice when choosing schemes and many, especially SMEs, do not have "the resources, expertise or time, to verify the advice they have been given." It suggested that the Government should put "obligations on the pension industry to improve transparency" and should give "The Pensions Regulator responsibility for maintaining a register of schemes that meet the current criteria for auto-enrolment and developing a tool to help employers/trustees make sense of charges/costs." [66]

Self-regulation and transparency of costs and charges

66.  Industry bodies have recently made some progress towards encouraging their members to provide greater transparency of costs and charges.

  • The Investment Management Association (IMA) published guidance on disclosing fund charges and transaction costs in September 2012. The guidance details the IMA's expectations of enhanced disclosure of costs and charges to investors (including pension scheme members). It expected its members to comply with the guidance by March 2013 at the latest.[67]
  • The National Association of Pension Funds (NAPF) launched an industry code of conduct on transparency of charges in November 2012.This encourages anyone providing services or advice directly to employers in setting up or administering a pension to set out the charges levied on funds and the potential impact they might have over time on the final size of pension pots.[68] The NAPF intended the requirements of the code to be active from January 2013, and from April 2013 the information will be put on an online web-tool to allow employers to make comparisons between different providers.
  • The Association of British Insurers (ABI) published an industry agreement on the disclosure of pension charges in January 2013, to be phased in between 2014 and 2015, in which all signatories will give an undertaking that their pension scheme costs and charges will be clearly presented to customers. The specific details of the disclosure requirements are currently being worked out between the industry and the ABI.[69]

67.  There was broad approval for these codes and guidance and witnesses agreed that it was very important that comparison tools were available to enable employers and employees to see the potential impact of costs and charges on final retirement income.[70] However, some witnesses believed that the timetable for these improvements would mean that many employers would have already made the key decisions about their auto-enrolment pension scheme before the guidance comes into force, as employers are likely to start making decisions about which auto-enrolment scheme to use 12 to 18 months before their staging date.[71]

68.  Other witnesses were openly sceptical of the guidance and codes being produced by industry bodies. Michael Johnson argued that: "We need to be very clear that codes of conduct are essentially voluntary rather than mandatory, and therefore, in my mind, it raises the question as to whether the trade bodies are simply trying to buy time."[72] Joanne Segars of the NAPF denied that the code of conduct they had produced was a ploy to buy time. She called Mr Johnson's remarks "rather cynical".[73]

69.  We welcome the work done by pensions industry bodies to encourage greater transparency in communications about costs and charges and their potential impact on retirement income. However we are concerned about the lack of enforceability of these codes and the lengthy timeline for implementing some of them and for producing online comparison tools. We are particularly worried by the possibility that the facility for employers to compare scheme charges will not be available until after many have already made their decisions regarding auto-enrolment.

70.  We recommend that the Government review the levels of transparency across the pensions industry early in 2014. If it concludes that employers are still prevented by a lack of transparency from making informed choices about the potential impact on their employees of saving in different pension schemes, we recommend that it imposes a charge cap on auto-enrolment qualifying schemes or on the schemes which are not complying with the transparency codes and guidance issued by industry bodies. We further recommend that consideration is given to penalties and enforcement if the industry fails to self-regulate effectively within the next three years.

Self-regulation and annuity purchases

71.   After the age of 55, people have the option to convert their pension pot into a retirement income. One way of doing this is through purchasing an annuity (though it can be achieved through other means, such as income drawdown). Annuities are contracts between an individual and their annuity provider (often an insurance company) in which the provider agrees to pay an income to the individual for the rest of their lives. Annuities can consist of a (nominal) level income or can rise yearly by an agreed percentage or in line with an inflation index. Annuities can be paid solely to an individual, ceasing payment on that individual's death, or can pay out to an annuitant's dependant, although these joint annuities pay out at a lower rate.

72.  Annuities do not have to be purchased from the same provider with whom an individual has saved into a pension scheme, but many people are unaware that they have the option to use other annuity providers.

73.  Witnesses expressed concerns about the lack of transparency around annuity pricing and the lack of knowledge of the option to "shop around" at the point of retirement.[74] People who purchase an annuity from a provider other than their original fund-holder can receive a substantially higher annuity income; in some cases as much as 20% more.[75] People who suffer from ill-health (and are therefore eligible for enhanced or impaired-life annuities which pay out at higher rates in expectation of reduced longevity) could see an increase in annuity income of up to 40% from shopping around.[76] It is important to note, however, that in some cases the best annuity deal will be offered by an individual's original provider. Michael Johnson highlighted that a third of people over age 55 have never heard of the option of shopping around, and that 70% do not even fully understand what an annuity is.[77] The pensions industry has been working to improve communications with pension scheme members to raise awareness about the importance of shopping around for a better deal. As a result, the proportion of members purchasing an annuity from a provider other than their original fund-holder has increased from 35% of annuity purchases in 2008 to 46% in 2011.[78] However, this increase is not considered sufficiently significant as many people are still missing out on the most favourable annuity rates.

74.  The industry is aware that a problem persists. The ABI published a Code of Conduct on Retirement Choices in March 2012, requiring all ABI members to "ensure that customers are equipped with the information they need to understand their options, shop around and make an informed decision about their income in retirement." The ABI intends to:

[...] publish the annuity rates of all our members, regardless of whether they are competing for annuity business in the open market or not. This will allow customers to understand where their provider fits into the wider market, and allow commentators and the media to better understand how the annuity market and how rates are developing.[79]

The deadline for compliance with this Code was 1 March 2013.[80]

75.  The FSA also announced in January 2013 that it would be conducting a thematic review "exploring the risk of detriment that consumers may face as a result of not shopping around when purchasing an annuity." This review will be taken forward by the Financial Conduct Authority (FCA) from April 2013 and will "involve a pricing survey of all annuity providers, and will compare the rates available to consumers through a range of distribution channels, including rates available through the Open Market Option and those only available to existing pension policyholders."[81] The FSA intends the review to take account of the implementation of the ABI's Code of Conduct on Retirement Income.

76.  We believe that the industry is failing pension scheme members when they convert their pension funds into annuities. Purchasing an annuity from a provider other than the one which holds an individual's fund could increase their retirement income by as much as 20% to 40%. However many people are unaware that they have the option to shop around for an annuity. We recognise that the industry is working to improve take up of the option to shop around and we welcome the ABI's Code of Conduct on Retirement Income Choices and the FSA's thematic review of annuities.

77.  Nonetheless, we recommend that the Government and regulators institute a mandatory system whereby, when consumers come to purchase an annuity, their pension provider is required automatically to supply them with a comprehensive breakdown of all the different annuity rates available to them from different providers, including options and rates for enhanced and impaired life annuities. We also recommend that, as a last resort, the Government considers taking steps to separate the function of providing pensions schemes from that of providing annuities.

62   Ev 146 Back

63   Qq 2 [Mr Pitt-Watson], 149, 156, 237 [ TPAS] Back

64   Ev 146  Back

65   National Association of Pension Funds, B&CE, Telling employers about DC pension charges: research, September 2012, p 14. Back

66   Ev 146  Back

67   Investment Management Association, Enhanced disclosure of fund charges and costs, September 2012. Back

68   National Association of Pension Funds, Pension Charges Made Clear: Joint Industry Code of Conduct. Telling employers about DC pension charges, November 2012. Back

69   Association of British Insurers, Agreement on the Disclosure of Pension Charges and Costs, January 2013. Back

70   Q 206 [Mercer], Q 355, Ev 160 Back

71   Q 256 [Which?], Q 318 [Pensions Minister] Back

72   Q 16 Back

73   Q 99 Back

74   Qq 21, 125 Back

75   The Pensions Institute, National Association of Pension Funds, Treating DC scheme members fairly in retirement?, February 2012. Back

76   Ev 175 Back

77   Q 21 Back

78   Michael Johnson, Centre for Policy Studies, Put the Saver First, June 2012, p 184.  Back

79   Ev 116 Back

80   Association of British Insurers, Code of Conduct on Retirement Choices, March 2012. Back

81   Financial Services Authority, Insurance conduct supervision newsletter, January 2013, p 3. Back

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Prepared 25 April 2013