Employers have been warned against choosing a workplace pension scheme based purely on cost.
Last week, Nausicaa Delfas, chief executive of The Pensions Regulator, said the body expects the pensions industry to deliver better services for a fair price.
She said for a young person with a defined contribution pension a small difference in returns could mean tens of thousands of pounds more in retirement.
Delfas said: “We’re told time and again that cost is what often drives decision, but in what other industry would you be buying a product or service based only on how cheap it is rather than also considering the quality of what’s provided?
“That can’t be right. Master trusts need to have the confidence that the market will allow them to compete in terms of value and returns.
“The issue is not regulatory, but cultural – employers and advisors are deciding on schemes using the easiest metric to quantify, cost.”
The comments have been welcomed by head of retirement policy at AJ Bell, Tom Selby.
He said it is no good having an “ultra-cheap pension if the investment performance is terrible and the service is rubbish”.
He acknowledged that cost is a vital part of the voice but needs to be combined with long-term returns.
Selby said: “Policymakers undoubtedly have an eye on nudging big schemes in particular to ramp up their exposure to private equity as part of increasingly desperate efforts to boost investment in UK Plc.
“It is important any shift in investment approach is driven by delivering good member outcomes first and foremost, considering both the price of those investments and the realistic prospect of them delivering long-term returns.
“For individual savers, this is a reminder that workplace pension default funds are, by their very nature, not tailored to your particular risk preferences and retirement goals.
"Auto-enrolment is also creating a vast sea of lost pension pots, each potentially sat in a default fund that isn’t tailored to your needs.”
Early in February the Department for Work and Pensions, The Pensions Regulator and the Financial Conduct Authority published their long-awaited value for money consultation.
It proposes introducing a common value for money (VFM) framework, initially for workplace pension default arrangements, including legacy schemes, but ultimately for all defined contribution pensions: workplace, individual and in decumulation.
The aim is to enable those running pension schemes to compare and improve the VFM they provide while driving competition and removing under-performing schemes from the market.
tara.o'connor@ft.com
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