The government and regulators should not wait for the industry to “fail to act voluntarily” to provide value for money in pensions, the Work and Pensions Committee (WPC) says.
In a report on pension costs and transparency, published today (5 August), the committee said that, while the government and regulators are alert to concerns over cost disclosure, there should be no cause for complacency.
It said industry involvement is important to ensure that policies work in practice—but the overall drive and direction must come from the government and regulators.
While the WPC said it recognised that value for money is not solely about costs, it added they inevitably form an important part of the equation.
Schemes should therefore clearly communicate their interpretation of value for money, and how it will be achieved, to their members. Yet, without an agreed definition of value for money, it is not possible to make effective comparisons, it added.
The MPs also said the charge cap on defined contribution (DC) schemes used for auto-enrolment – currently set at 75 basis points – does not appear to have had the negative impact some had predicted, although the cap does not cover all charges, such as hidden transaction costs. It said this makes it impossible to know how well the cap is working in practice, and within the cap, savers can also face “wildly different outcomes”.
It said it was not encouraged by the Department for Work and Pensions’ (DWP) consultation to better enable DC schemes to invest in illiquid assets while not fundamentally undermining the charge cap.
DB schemes
The committee also addressed value for money in defined benefit (DB) schemes, noting that, with many schemes in deficit, it is important that the same scrutiny to value for money is given by trustees as it is for DC schemes.
“Better scrutiny of value for money in DB schemes will either justify or avoid the need for the often difficult decisions being taken about the future of pension schemes,” the report said.
Association of British Insurers head of long-term savings Rob Yuille noted that consumers “deserve to be given clear and useful information about pension costs and charges”.
“Unfortunately this confusing patchwork of rules makes the information presented harder to digest for consumers,” he added.
“We suggest the committee joins us in calling on the government and regulators to better align these muddled regulations in their joint work, to ensure that customers receive key information in an easy-to-understand format.”
The WPC’s report also called for a resolution to the anomaly of net-pay pension tax relief, whereby non-taxpaying members miss out on the tax relief they would receive in relief-at-source schemes.
It said this risks damaging faith in the system by perpetuating arrangements that cause individuals to lose noticeable sums through decisions they did not make.
Pensions dashboard
Furthermore, it said that it accepted the pensions dashboard – which will be rolled out from this year – will be launched in a timely manner but will be limited at the outset.
“This should not be at the expense of the launch excluding any key data on an individual’s pension savings, including personal state pension projections.”
It said it recommended that by the end of 2019 the government should publish a timetable for the rollout of a non-commercial pensions dashboard, and that it should feature retirement income targets to ensure the information is meaningful to its users.
In April, the DWP published its response to its consultation on the dashboard – asking the industry to “create and test” consumer-facing dashboards by the end of the year.