Pension auto-enrolment 'open to mis-selling'
The recently launched landmark policy of pension auto-enrolment may be a bad idea for some workers, pensions experts have warned.
Up to nine million people will be automatically recruited into company-backed pension schemes by 2018.
But the Pensions Institute says if they join an existing defined-contribution scheme, they could face very high charges and poor investment returns.
The report says high charges on "legacy" schemes must be abolished.
"Charges for default funds in large new auto-enrolment schemes generally represent good value, but tens of thousands of employees currently are trapped in the funds of older schemes with high and disguised charges," the report's authors say.
"There is a very real danger that smaller employers will use these older schemes for auto-enrolment, potentially bringing millions of new pension investors into poor value default funds.
"Our findings from the quantitative analysis show that the retirement incomes of these in the high-charging schemes will be worth only about an average of 50% of the income achieved by members in low-charging schemes after 40 years of membership," it adds.'Members will suffer detriment'
The report, Caveat Venditor, is published by the Pensions Institute at the Cass Business School, which is part of City University in London.
- Workers not already in a company pension scheme will be enrolled if they are aged between 22 and the state pension age
- However, these workers must be earning at least £8,105 a year
- The contribution they, and their employers, make will be based on their wage, although the first £5,564 a year they earn will not be taken into account
- Any earnings above £42,475 will also be ignored in the contribution calculation
- So the amount between £5,564 and £42,475 is known as their pensionable pay
- Staff can opt out
The Pensions Institute argues that if newly enrolled workers join a multi-employer scheme, or a newly established company scheme run by an insurance firm, then they will probably pay low total charges, amounting to about 0.5% of the funds under management each year.
But if they join an older established company defined-contribution scheme of their employer's, the charges are likely to be much higher.
"A 'brownfield' employer... is likely to have been sold a contract based scheme in the 1990s or early 2000s, with a total member charge [known as a total expense ratio] of 2-3% of assets under management," the report says.
"Unless these employers are told otherwise, they will use their existing schemes for auto-enrolment. If this happens, millions of members will suffer detriment."
The research was sponsored by NOW:Pensions, a UK offshoot of the Danish ATP pension fund which in Denmark covers 160,000 employers and 4.7m workers.
It has been trying to establish itself in the UK by offering its services to employers who, under auto-enrolment, will be forced for the first time to offer their staff a pension scheme, to which the employers as well as the employees must contribute.
NOW:Pensions is in competition with other group pension providers, such as the recently established Nest and the long established B&CE multi-employer pension scheme for the construction industry.Kite mark needed
The Pensions Institute argues that high charges are opaque, even to the employers themselves.
End Quote Prof David Blake Pensions Institute
A clearly signposted kitemark website for good quality value-for-money schemes would facilitate fair and equal treatment for all private sector employees”
If nothing is done about the problem of excessive costs, then the whole auto-enrolment project will eventually lay itself open to accusations of pension mis-selling on a huge scale, the authors say.
The solution, the report argues, is to abolish high charges on "legacy" DC schemes, either by voluntary agreement, or by regulation, to bring them down to no more than 0.5%.
Also, a new kitemark system should be devised which would identify well-run, low-charge, schemes for the benefit of both employers and their staff.
Professor David Blake, director of the Pensions Institute, said there was still time to act, which would be of particular benefit to the many small employers.
"These employers are not required to introduce auto-enrolment immediately but many companies will need to be prepared by mid- to late-2013," he pointed out.
"A clearly signposted kitemark website for good quality value-for-money schemes - available to all employers, irrespective of their size and employee profile - would facilitate fair and equal treatment for all private sector employees, irrespective of how much they earn and the company for which they work," he added.
Tom McPhail, pensions expert at financial adviser Hargreaves Lansdown, said the report exaggerated the risk of workers being auto-enrolled into a high charging scheme.
"Recent DWP research shows that average pension charges for workplace pensions are now below 1%," he said.
"The report calls for a price cap on group pensions of 0.5%. We believe that this would stifle innovation, undermine member service and communication and ultimately it would lead to poorer member outcomes."