New pensions code to boost your retirement pot
We look at a new pensions industry code of conduct that, while limited in scope, should still improve your pension pot.
The pensions industry has set up a code of conduct for auto-enrolment pension schemes, which could lead to larger pension pots for enrolled employees.
The code's sole focus is how charges are disclosed to employers. This is revealed in the name: Pension Charges Made Clear Code of Conduct.
It is your employer who chooses who will provide your auto-enrolment scheme.
What the code is for
The code is designed to make auto-enrolment pension charges more clear to employers by presenting all the costs in a standard way. The goal is to make comparing charges easier.
For the first time, pension providers will also clearly show the cost of some charges that have traditionally been well hidden. These are the trading costs – the cost of buying and selling shares and other assets for your pension fund.
Anyone signed up to the code will need to comply with it. I would expect that all providers of auto-enrolment will do so.
How the code affects you
If you never join an auto-enrolment scheme, the code is of no interest to you. Part of the code takes effect from 1 January 2013, so all or most people auto-enrolled before then will not benefit. The remainder of the code is expected to take effect from May 2013, so employers comparing schemes after this point – and their employees – should benefit.
If the code achieves its stated goal and your employer does a good job researching the schemes, you are more likely to end up with a bigger pot when you retire. This is because you should end up in a plan with lower charges.
There is more than enough research, stretching back decades, that shows that costs are the single biggest indicator of future performance when comparing one pension fund to another similar one. The higher the costs, the smaller you can expect your final pot to be.
In investing, you don't get what you pay for.
Your protection if the code is breached
Since the new, voluntary code of conduct is targeting employers rather than consumers, it won't necessarily be legally binding on the providers. (For those of you interested in technical nitty-gritty, this will depend on the effects of any specific breach of the code and the courts' interpretation of the Consumer Protection from Unfair Trading Regulations 2008.)
Even so, the Pensions Ombudsman and Financial Ombudsman Service can still use the codes when making rulings. These ombudsmen are free services that can force financial companies to compensate you when they have treated you unfairly.
Loopholes and other problems
The code sets out examples of the information that employers will start receiving from auto-enrolment providers. It will certainly make their jobs easier, and should lead to better auto-enrolment pensions for employees. However, it isn't watertight and doesn't solve all your problems.
To start with, the code applies to default funds only. These are the investment funds that your pension provider will put you in if you don't do some research, use your brains, and move to their non-default funds. I can see potential wiggle room left here for providers; for example, they could charge more for non-default funds and then manipulate employees to switch into them.
Also, I notice that if a pension provider changes its charges, the code says it must notify the employer in writing, but it doesn't say the provider must present the new charges in the same complete, well-structured way as before. This could potentially mean that employers are suckered in with a nice cheap plan only to be bamboozled later when charges rise.
The focus on making charges easier to compare might make providers lower their prices, but the code doesn't specifically attempt to do this. The pensions industry has long been charging high costs to less informed consumers and employers.
Finally, the code does not help with another major issue: your decision about whether to opt out of the scheme.
With these pensions, you get free money from your employer, tax-free capital gains, a tax-free lump sum at the end, and either deferred or reduced lifetime income taxes, but you also need to consider potential downsides to pensions, which I have described in 20 reasons pensions go wrong and Saving in a pension? You're as well off on benefits.
What others are saying
Looking to other expert views, we have consumer group Which? This was one out of more than a dozen organisations that was consulted about how to develop the code, yet it was just one of two that solely represents the interests of consumers and employees. Most of the other consultees represent the pension providers.
Which? is pleased with what the code achieves, but it stated that it would like to see minimum standards to ensure all schemes offer good value for money.
The TUC was the other body that was consulted which represents employees. It called the code “a big step forward”.
The pensions minister, Steve Webb, is not complacent though. He called the code a “starting point”, and said:
“We hope to see the code’s widespread adoption and for individuals to be enrolled into schemes with value for money and transparent charges. However, we are prepared to consider taking action more broadly on charges if insufficient progress is made.”
More on pensions and auto-enrolment:
Workplace pensions: the alternatives to NEST