Under the Government's pension reforms between 5 and 8 million people are expected to be saving more or saving for the first time, the vast majority into DC schemes. Automatic enrolment raises the bar for the industry in areas such as the scheme governance and administration. Providers will need to deal with new processes, and significant numbers of employers and employees that lack previous engagement with pensions.
Chief executive of The Pensions Regulator Bill Galvin said:
"We expect all DC schemes to demonstrate how they will comply with our principles for good DC schemes and this will give employers reassurance about their choice of scheme.
"Members bear risks where DC schemes perform poorly. Many members will not have any experience of DC pension saving, so it's vital that schemes are run by capable people who act in members' interests - from enrolment to retirement.
"Where we find schemes fall short of the standards we have set out, we will expect them to improve. Some smaller schemes may find this challenging and decide that the interests of their members would be better served in another type of arrangement."
The regulator is working with the pensions sector to encourage the design and delivery of pension products run in accordance with its principles and quality features for good DC schemes. Their research indicates that larger DC schemes, benefiting from economies of scale, have the resources, governance, time and expertise to be able to comply. The regulator's communications to employers will steer them towards choosing schemes for their workforce that meet these standards.
Key elements of the package of measures published for consultation today include:
- A set of 31 DC quality features covering key areas such as contributions, investments, governance standards, administration, value for money, converting a pension pot into a retirement income and member communications.
- A ‘comply or explain' regime - occupational DC trust-based pension schemes will be expected to adopt a disclosure framework to demonstrate how they comply with the DC quality features, or to be able to explain any inconsistencies. Disclosure will help to give employers confidence that schemes they choose for their workers meet certain standards and will require trustees to consider what processes are in place that ensure the presence of the each feature. Schemes might choose to disclose this information via their annual report, for example.
- 'Master trusts' will be expected to obtain independent assurance which can help demonstrate that they comply with the DC quality features. Master trusts have potential to offer benefits such as low charges and good governance. However, because of the significant numbers of workers expected to be automatically enrolled into this segment, the regulator believes that an additional level of assurance is necessary to address risks such as low barriers of entry to the market and the potential for conflicts of interest if the trustees have a close association with the provider.
- A code of practice for occupational DC trust-based pension schemes that provides practical guidance on the requirements of pensions legislation and sets out standards of conduct and practice expected of those responsible for running schemes. Standards set out in the code will be a key reference as to whether enforcement action is necessary.
- The DC code should be read in conjunction with regulatory guidance setting out good practice standards in areas such as value for money, transparency of costs and charges and member communications.
- Where trustees fall short of the standards expected the regulator can take action to put things right. This includes issuing notices directing compliance with the law, fines and removing trustees and replacing them with new ones.
The Pensions Regulator and the Financial Services Authority are working together to ensure similar levels of protection in both occupational DC trust-based pension schemes and work-based personal pensions (also known as contract-based schemes), where regulatory responsibility is shared. The regulator's initial analysis, published today, shows good alignment between the DC quality features and FSA requirements for work-based personal pensions.
Martin Wheatley, FSA managing director and chief executive designate of the Financial Conduct Authority, said:
"We welcome this publication from The Pensions Regulator, and are pleased that the initial analysis confirms that there is good alignment between the regulator's quality features and our requirements. We enjoy a good working relationship with the regulator and we will continue to work with them to develop this analysis further."
Kate Smith, Aegon's Regulatory Strategy Manager, said:
"We're extremely pleased to see TPR acknowledging the many ways in which pension schemes run by FSA supervised firms already deliver on the TPR's Six DC Principles and the many of the 36 features which underpin these.
"Some commentators often overlook, or simply aren't aware of, the many positive governance arrangements and scheme design features offered by providers of GPPs and wrongly jump to the conclusion that ‘trust-based is inherently best'.
"Contract-based schemes, no matter what their size, benefit from the advantages of scale offered by GPP providers. These can include choice of a number of carefully constructed default funds, comprehensive member communications and on-line tools. FSA regulation sets minimum standards, but to remain competitive, GPP providers must innovate and go beyond these minima. All this helps improve member outcomes - TPR's objective.
"TPR is today acknowledging the many safeguards inherent within workplace pensions offered by FSA regulated firms. Relevant FSA regulations include Treating Customers Fairly principles, capital requirements, systems and controls and the approved persons regime. Of course this isn't just contract-based GPPs, but also insured trust-based scheme offered by FSA regulated firms."
Aviva's Head of Policy for Corporate Benefits, John Lawson, said:
"Aviva supports the Pensions Regulator's key findings and its desire to bring enhanced governance to trust schemes - similar to that currently applied to contract schemes.
"Strong governance and effective regulation is key to ensuring the delivery of good member outcomes. The Pensions Regulator has recognised the extensive governance already in place for contract schemes, such as group personal pensions, covering Treating Customers Fairly, other FSA requirements, and simple good business practices. So it makes sense to build on this for trust-based schemes as well."
"The Pensions Regulator is clearly concerned about the structure and operation of some master-trust arrangements currently being marketed as automatic enrolment solutions. Given the importance of achieving good member outcomes for automatic enrolees, it is critical that these schemes are governed properly. The costs of doing so may lead to some of these schemes winding-up."
TUC General Secretary Frances O'Grady said:
"With millions of workers due to start saving in pensions for the first time, as auto-enrolment works its way through the workforce, this consultation is very timely.
"With initial contributions so modest, it's vital that every pensions pound saved works as hard as possible. The Regulator is right to stress the importance of scale, good governance and charges.
"We particularly welcome the focus on pensions company sponsored mastertrusts where there are real concerns about conflicts of interest. Many of these were set up to exploit the loophole that allows employers to get their contributions back through short-service refunds - but this runs completely counter to the interests of members.
"This consultation is a further step towards improving DC pensions. With ministers choosing a pot-follows-member approach to small pots, it is more vital than ever that every DC scheme is of the highest quality."
