Pensions update: Regulating the DC landscape
Earlier this month the Pensions Regulator published a suite of documents which set out how it intends to regulate money purchase occupational pension schemes. This builds on the Regulator's work of the past two years and reflects a much stronger focus on ensuring that the members of these schemes are provided with access to schemes which are more likely to provide them with good outcomes.
It is widely recognised within Government that it will not be enough for employees if employers only comply with the minimum automatic enrolment obligations. Quality is the name of the game. Since every employer in the land (including those who already have a pension scheme) will be required to make a decision on which scheme to use for auto-enrolment, the Government sees this as an opportunity to drive up standards.
In more detail
The Regulator published a draft code of practice, its regulatory guidance and its strategy for regulating money purchase occupational pension schemes. At the heart of its strategy are the six principles which the Regulator feels are more likely to drive good member outcomes. These principles are that:
- schemes are designed to be durable and fair and that they deliver good outcomes for members;
- a comprehensive scheme governance framework is established at set up, with clear accountabilities, and responsibilities agreed and made transparent;
- those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out;
- schemes benefit from effective governance and monitoring through their full lifecycle;
schemes are well-administered with timely, accurate and comprehensive processes and records; and
- communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.
This principle based approach to regulation is similar to the established FSA approach. Indeed, there has been collaboration between the Regulator and the FSA and the Regulator has also produced a document demonstrating how these principles are already present in contracts-based arrangements under the FSMA regime.
The principles are underpinned by what the Regulator likes to describe as quality features. Some might feel that these are too broad and uncontentious to guide trustees' decision making, which is why the Regulator has sought to give practical guidance on how trustees can demonstrate they have achieved the relevant standards in its code and guidance.
The code itself is unremarkable in content but still useful, since it consolidates and (to some extent) updates the Regulator's expectations of trustees managing money purchase occupational pension schemes. Although the code itself will not be legally binding on those subject to it, the courts are required to take codes issued by the Regulator into account where it appears relevant to a question before the courts (for example, as to whether trustees have acted properly).
The more controversial and interesting material is found within the regulatory guidance which covers hot topics such as ensuring "value for money" to members on an ongoing basis. The Regulator is clear that trustees will be expected to monitor and, where appropriate, take action where it is considered that "value for money" is not being provided. This might, for example, include challenging a scheme administrator, investment manager or legal advisers on costs and the depth, scope and quality of the services provided.
The Regulator has set out a clear "comply or explain" strategy. Trustees will be asked to demonstrate to members how they have satisfied themselves that the Regulator's quality features are present within their scheme or explain why this is not the case. Although this system is described in the guidance as voluntary, the inference is that the Regulator is likely to use its more specific and targeted information gathering powers against those schemes which do not appear to be taking steps to comply.
What does the Regulator want the DC landscape to look like? There is an interesting narrative running through these publications. On the one hand, the Regulator has warned about the risks of Master Trusts. It seems especially suspicious of the potential conflicts of interest which may arise in Master Trusts. The concern is that they could operate to the detriment of the members. For example, if a Master Trust is set up and promoted by an insurance company as a vehicle for auto-enrolment, an in-house trustee might have the insurance company's interests at heart. Also, the provisions of the trust deed could limit how, when and in what circumstances a trustee board can promote the best interests of members by, for example, moving investments and administration from the insurer where performance is sub-standard. On the other hand, a key message from the Regulator is that big is often better, although the Regulator stops short of saying that small schemes will always deliver poorer outcomes. The Regulator sees economies of scale driving efficiency within the pensions market.
Defined benefit schemes may be going the way of the Dodo, but the problem of people living longer with fewer state resources to support them is not going away. The future is money purchase and UK business should expect to see increasing regulation for trust based money purchase schemes and maybe even for contract based personal pensions as well.