Members who cease paying into defined contribution pension arrangements often pay higher management charges than their colleagues who continue to add to their savings. This two-tier charging approach is euphemistically referred to as the ‘Active Member Discount’ (“AMD”). I guess the term ‘deferred member penalty’ failed the focus group tests, despite being a more accurate description. AMDs have been around for many years but came to prominence in the Office of Fair Trading’s (“OFT’s”) seminal ‘defined contribution workplace pension market study’ published in September 2013. The Study concluded that AMDs may lead to consumer detriment. The OFT also proposed banning the use of AMDs from schemes used for Auto Enrolment.
The most recent ‘Better workplace pensions: Putting savers’ interests first’ Consultation Paper, and related draft regulations, from the Department for Work & Pensions (“DWP”) has taken-up the OFT’s proposal, albeit to a limited extent. The Consultation Paper proposes that the ban on AMDs only applies to the savings of members who make a contribution to their Auto Enrolment compliant scheme after April 2016 rather than all savings made under Auto Enrolment (let alone all defined contribution savings). The reduced scope of the ban is explained by the DWP as “supporting the roll-out of automatic enrolment through minimising the disruption to existing schemes”.
The ban on AMDs, even in its limited form, is a welcome first step. However, it feels like an opportunity to widely reduce the risk of consumer detriment has been missed. The OFT famously found that “the buyer side of the DC workplace pensions market is one of the weakest that the OFT has analysed in recent years” and “competition alone cannot be relied upon to drive value for money for all savers in the DC workplace pension market”. Both providers and purchasers/savers should not have to rely on Government intervention to address predatory practise – although such State support would be welcome in this instance. I am aware that some selection agents/advisers raise concerns with their clients about providers that continue to include AMDs in their offerings (perhaps alongside the use of premium-rate numbers for customer call centres and other measures to redistribute as much of the saver’s retirement assets to the provider as possible). Purchasers do have access to alternative providers that are more even-handed in their treatment of savers.
The Consultation Paper’s response period has now closed but the draft regulations are still subject to the DWP’s review and subsequent parliamentary process. Here’s hoping that more is done to eliminate AMDs ahead of the regulations taking force in April 2015. Even if the proposals in the Consultation Paper do not change, what’s stopping providers from exercising enlightened self-interest and treating savers’ equitably by eliminating AMDs (in all cases)?