Investment consultants to the UK’s £1.6 trillion pension fund industry face tougher rules and mandatory tendering, but have escaped a forced break-up after a probe by the competition watchdog.
The Competition and Markets Authority (CMA) has outlined a raft of proposals to address concerns over competition in the sector for investment advice to pension schemes, which is dominated by Mercer, Willis Towers Watson and Aon.
The CMA said it was vital competition was working well in the sector, with investment consultants and so-called fiduciary managers having influence over half of all UK households’ retirement savings.
But the CMA stopped short of demanding a break-up of the Big Three, saying their combined market share was below 50%, with no significant barriers to entry for rivals.
The CMA instead wants new rules to improve competition, including compulsory competitive tenders for pension trustees appointing their first fiduciary manager.
Those who have already made appointments without doing so must put the contract out to tender within five years.
Fiduciary managers must also provide clear information on fees and how they have performed for other clients, so pension trustees have the information they need to make meaningful comparisons between providers, according to the CMA.
It is making recommendations for new guidance from the Pensions Regulator for trustees on how to choose and scrutinise providers, while it also wants the Financial Conduct Authority (FCA) to have greater oversight of the industry.
John Wotton, chairman of the investigation at the CMA, said: “We’re concerned that pension schemes are not currently putting pressure on the market to get the best value for money on behalf of their members.
“They may lack the information they need to compare competing offers and so could be sticking with their existing investment consultant or fiduciary manager when there are better options available.
“This is an extremely important sector that influences how well millions of people’s pension savings are invested, and it’s therefore vital we take steps to make sure that competition is working properly.”
The CMA has been probing the sector since September after the FCA raised concerns.
The CMA said around half of pension schemes choose the same provider for fiduciary management that they use for investment consultancy, which means these providers have a significant advantage over other firms.
It also found that only a third of trustees ask firms to compete for their business through a tender process.
The Society of Pension Professionals (SPP) said the CMA had “clearly done its homework”.
John Nestor at the SPP said: “We embrace what the CMA are suggesting and believe that the recommendations put forward are pragmatic and well considered.”
Lesley Carline, president at the Pensions Management Institute, said: “The introduction of mandatory tendering will see a requirement for participants to behave in a more open and competitive manner and this can only be in the best interests of schemes and their members.”