Pensions seem to be the subject of almost continuous legislative and regulatory change. It is little wonder, therefore, that employers, trustees and scheme members often find it hard to keep pace with this constant treadmill of activity. Yet the current economic slowdown and the government's plans for a national pensions saving plan, due to come into effect in 2012, mean that a clear understanding of occupational pension schemes is more important than ever.
In recent years, many employers have decided to take a step back from the hands-on management of their scheme by replacing risk-laden defined benefit (DB) pension plans and trust-based defined contribution (DC) schemes with contract-based defined contribution schemes, such as stakeholder and group personal pension (GPP) plans, where the contract is held between the employee and provider.
However, even these are coming under tighter scrutiny from the Pensions Regulator, which, in January, published guidance for employers running contract-based DC schemes. Called Voluntary employer engagement in workplace contract-based pension schemes, the document recommends employers put arrangements in place for their schemes to be periodically reviewed so, for example, administrative problems can be identified early on, charges can be monitored and member understanding improved.
Although this is not intended to impose further obligations on employers, Justin Wray, head of pensions administration and governance at the Pensions Regulator, explains that employers running contract-based schemes need to ensure they are comfortable with their pension arrangements.
He believes there is a particular need to boost levels of member understanding. "As we go increasingly into a DC world in which the greater number of risks are borne by the member, it is vital members have the highest [possible] degree of understanding of their pension and the risks that they bear, and of facts such as the impact of investment choice and so on," he says.
While employers have sought to reduce their own risks by moving away from DB schemes and the potential liabilities that can come with them to DC schemes, where members carry a greater degree of risk, these will still fall under the remit of the Pensions Regulator, which regulates all work-based pensions. Established by the Pensions Act 2004, the government body came into effect on 6 April 2005 and is tasked with improving the security of members' pension benefits by identifying a scheme's level of risk and taking action to reduce or remove this if appropriate to do so. Initially, the Pensions Regulator focused on ensuring that DB schemes put in place strategies to clear their funding deficits, now it is casting its net wider as more employers switch to DC.
Wray says employers that have decided to opt for DC still have a duty to ensure the plan is well managed and governed. "[Employers] have to decide fundamentally what they want the balance of risk to be between them and their members. We must accept many employers choose a DC scheme partly because they wish to be rid of their own liability so they need to decide at a high level the extent they wish to share, if at all, liability between themselves and their employees. Whatever decision they come to on that, they should seek to ensure their scheme is well governed and well administered, [by for example ensuring, there is a regular review of investment funds, [and] record keeping and administration are kept up to date. That should minimise the risk of things going wrong, and particularly in a DC market, it can be terribly costly to untangle," he says.
Wray says that there are five key areas where there is the greatest potential for organisations to run into difficulties around their DC pensions provision. These comprise member understanding, administration, investment, charges and retirement options.
Employers and trustees that get the governance of their schemes right and excel in these areas will be operating within best practice standards. "If employers consider these issues and have frameworks to deal with those, then that will be [an apt] way of ensuring they are running a good DC scheme. If they manage those areas well then they increase their chances of running a scheme that is going to be good for their members and their employees," he explains.
While issues around risk may have occupied the minds of employers running pension schemes over the last few years, they will have other issues to consider in the run up to 2012 when the government's proposed national pensions savings plan is due to come into effect. Organisations will be required to automatically enrol employees into either an occupational pension scheme or into the government's system of personal accounts unless staff decide to opt out. In addition, employers will have to contribute a minimum of 3% of each employee's salary into the scheme, while employees will have to make a 4% contribution and the government 1% in the form of tax relief.
Although there are still four years to go until these changes are implemented, Wray believes that employers should already be thinking about how their pensions offering is likely to be affected. "It is clear that the pensions landscape is going to change as we approach 2012 and the introduction of personal accounts. I think [employers] should be starting to think about it," he explains.
He adds that the changes in legislation are likely to have a huge impact on pensions provision, particularly due to the increase in the number of employers that will have to make contributions of at least 3%. According to figures from the Department for Work and Pensions, only around 300,000 of the approximately 1.2 million organisations that will be covered by the new legislation currently provide a pension with an employer contribution of more than 3%. Auto-enrolment means that even those which already do so will have to increase the total amount they pay in contributions if only a portion of their workforce have, prior to 2012, signed up to their existing scheme.
"There is a potential issue among the number of employers out there who are not particularly strong at the moment in the provision of pensions on who, for example, the requirement to auto-enrol their employees could have a huge impact," says Wray.
Employers with occupational schemes in place may take the opportunity to review their overall provision and some are expected to level down the contributions that they make to 3% while others may even decide to abandon their existing scheme in favour of personal accounts.
Another issue close to the regulator's heart concerns conflicts of interest that can arise in the management and administration of pension schemes. In February, it published a consultation document, Conflicts of interest, on guidance to help trustees of occupational pension schemes assess the adequacy of governance arrangements they put in place to manage conflicts of interest. The consultation will remain open until the end of May.
"Where it is appropriate, an employer or trustees, [whenever] a conflict arises, needs to think about the identification and [management] of that and, where necessary, look at what we are saying and also, of course, rely on what their advisers, particularly their legal advisers, [recommend]," says Wray.
Overall, however, he believes employers and trustees are making progress when it comes to tackling the issues that are affecting occupational pension schemes, particularly in terms of their governance. As he concludes: "There is evidence of improvement in a number of areas, but that there is also still some way to go." ncareer biographyJustin Wray, head of pensions administration and governance at the Pensions Regulator, joined the government body in March 2004, just over a year before its powers came into effect.
He is currently working on pension scheme wind ups and standards of scheme administration. He has also worked on developing the Pension Regulator's medium-term strategy, its European Union interests and three of the codes of practice it has published to date.
Prior to joining the Pensions Regulator, Wray worked for HM Treasury on the regulation of financial services, and was a member of the team that took the Financial Services and Markets Act 2000 through Parliament. He led the two year review of the Act, the results of which were published in 2004.
Other roles Wray has held during his career have included running the UK's aid programme to Russia, and the UK government's interests in the International Monetary Fund (IMF).
The Pensions Regulator is the UK regulator of work-based pension schemes. It was established under the Pensions Act 2004, before coming into force on 6 April 2005, replacing the Occupational Pensions Regulatory Authority (Opra).
The regulator was designed to be a more proactive and flexible regulatory body with much wider powers than its predecessor.
The Pensions Regulator takes a risk-based approach to regulation and works to improve the security of scheme members' benefits. Its objectives under the terms of the Pensions Act 2004 are to protect the benefits of members of workplace pension schemes, promote good administration of such schemes, and reduce the risks of situations arising which may lead to compensation claims from the Pension Protection Fund. However, it will only intervene in the running of a scheme where necessary. It also aims to help employers, trustees and others understand how pensions law works and can take action if a breach occurs.
Under the terms of the Pensions Act 2004, the Pensions Regulator can fine individuals up to £5,000 and companies up to £50,000 if information about a 'materially-significant' breach of pensions is upheld.
The regulator also has the power to issue codes of practice to employers and trustees. It is currently in the process of issuing 12 initial codes of practice covering areas such as funding DB schemes, early leavers and trustee knowledge and understanding.
