The government should reassess the case for establishing a single body with sole responsibility for regulating workplace pensions, according to a report by the Work and Pensions Committee.
Its report, Improving governance and best practice in workplace pensions, raises concerns over current gaps in regulation and the potential for further gaps to arise as a result of having three regulators: The Pensions Regulator, and the new Financial Conduct Authority and Prudential Regulation Authority, which were set up to replace the Financial Services Authority (FSA).
The report also recommends that:
- Deferred-member charges and member-borne consultancy charges are both banned by government.
- The government, regulators and the pensions industry should work together to agree a communications format that clearly sets out the basic, essential pieces of information that pension schemes should provide to their members.
- The government and the regulators should investigate ways of assisting all employers that offer contract-based pension schemes to set up governance committees to oversee their pension scheme.
- If the pot-follows-member model remains the government’s preferred option for solving the problem of small pension pots, it must ensure that all schemes used for auto-enrolment benefit from good governance and are free from high charges.
- The government should continue to explore ways to encourage employers’ appetite for defined ambition risk-sharing schemes. The necessary steps should be taken to remove legislative and regulatory barriers to defined ambition schemes by the time the single-tier state pension is introduced and contracting out ends in 2016.
Anne Begg, MP and chair of the Work and Pensions Select Committee, said: “Under auto-enrolment, millions of people will be brought into pension saving for the very first time. The need for rigorous pension scheme governance has never been more vital.
“It is essential that all members of workplace pension schemes are protected from poor governance, irrespective of the particular scheme they are in. We do not believe this is always the case under the current regulatory system and evidence from the regulators failed to convince us otherwise. On the contrary, we are concerned that current gaps in regulation will be exacerbated by the fact that we now have not two, but three regulators involved: The Pensions Regulator, and the new Financial Conduct Authority and Prudential Regulation Authority, set up to replace the FSA.
“The government should reassess the case for establishing one body with sole responsibility for regulating workplace pensions. This body must be invested with sufficient powers to ensure that all members of workplace pension schemes are given the level and consistency of protection they need.
“The plethora of costs and charges that can be applied to pension pots are not only confusing, they can seriously impact on an individual’s retirement income. We are particularly concerned about member-borne consultancy charges and those charges applied to deferred members: people who stop contributing to their pension scheme. Neither can be justified; both should be banned.
“The trend towards lower pension scheme charges is welcome. However, a good average is not sufficient and we remain concerned by the potential for consumer detriment in schemes that persist in retaining high charges. [The Pensions Regulator] should carry out an urgent review of these outliers and take action if it considers this necessary. The government should also regularly review its policy on capping charges for auto-enrolment schemes and must act without hesitation if it becomes apparent that some members are at risk of detriment.
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“Consumers are also continuing to lose out when they buy annuities because pension providers are not doing enough to ensure people are aware that they can shop around for the best annuity rate, rather than being obliged to buy an annuity from their pension provider. We believe that it should be mandatory for pension providers automatically to supply their customers with a comprehensive breakdown of all the annuity rates available to them from different providers.
“The current poor standard of communications is a serious cause for concern and needs to be addressed. This is not a case of the more information the better. It is about providing only the information that is relevant to employers and employees, and presenting it as clearly and simply as possible, rather the current deluge of complicated documentation which pension scheme members currently receive.”
This report seems to be pointing at the right things. Let’s hope that its reccomendations are broadly adopted.
With millions more people saving into workplace pensions, this report rightly indentifies several key changes needed to prevent staff from losing out.
The TUC supports the call for the government to ban deferred member and consultancy charges. We also share the select committee’s concern that the government’s ‘pot follows member’ approach to staff with savings moving jobs could be detrimental for consumers.
The committee is also right to call for a rethink of the regulatory structure. The growth of auto-enrolment and the growing overlap between regulators means that a tougher but simpler structure will make it easier for good schemes to comply and harder for poor schemes to slip through the gaps.
One of the priorities for regulators must be to strengthen governance arrangements in DC pension schemes. We strongly support the committee’s call for workplace governance committees in the absence of trustee oversight. Giving members a voice in how their scheme is managed should be a key objective.
The committee is right, but for the wrong reasons. There are far too many regulatory bodies involved in UK pensions and the result is a bit of a mess. The only workable answer is to roll all of The Pensions Regulator’s activities into the FCA and for the FCA to have sole responsibility for all aspects of the pensions system. In the meantime, we have six organisations involved: FCA, PRA, TPR, HMT, DWP and HMRC. It’s hardly a surprise that the system isn’t working efficiently.
We wholeheartedly support the committee’s call for a single regulator. The majority of DC schemes could do more when it comes to good governance practice, but the most significant problems lie with those employers who have established a contract-based scheme and have no structure in place to review the effectiveness of the scheme. Unfortunately, without regulation to enforce minimum standards this situation is unlikely to change.
Many of the committee’s concerns on charges can be alleviated through the imposition of a charge cap for qualifying schemes. Our experience is that the majority of schemes already have in place a competitive charging structure, the main issue lies with legacy arrangements that haven’t been reviewed for many years.
We also endorse the committee’s views on member communication in that current methods need to change. Individuals care about what income they will get in retirement. They care less about how they will get there. The mechanics of a DC pension scheme will be of little interest to the majority of savers.
For example, our research among people currently saving into a DC pension found that 53% don’t know what their pension is invested. Most people just want to know that they will have enough to live off when they retire and what action they should take to reach their target income. In many instances people want the hassle taken out of their pension, with 66% of DC savers telling us that if their employer offered them a scheme whereby they set a target retirement income and their employer managed their pension to deliver that, they’d be likely to sign up.
The committee’s view that there would be considerable advantages in having one regulator responsible for regulating all workplace pensions makes total sense to me.
There is clear evidence that the present arrangements are fragmented with overlaps in both duties and responsibilities stemming from the absence of a single controlling body.
We are constantly hearing from either The Pensions Regulator or the FCA (previously the FSA) about the need to liaise and/or consult one with the other on a range of activities, slowing down the process and making for a very bureaucratic looking and sounding operation. The system is not only inefficient but positively dangerous, as the committee has rightly observed, in that gaps could exist in the respective jurisdictions which could allow important actions to fall between two stools and be omitted altogether.
There appear to be no over-riding operational reasons for having more than one regulator in the pensions field – indeed it is surprising that the government hasn’t jumped at the opportunity previously to capitalise on the very real administrative cost savings such a merger would undoubtedly produce. The suspicion remains that the main driver for holding to the status quo is reluctance on the part of both parent departments – the DWP for TPR, the Treasury for the FCA – to let loose of the pension brief and cede responsibility and power to the other.
At a time when millions of workers are being auto-enrolled for the very first time into workplace pensions schemes, the role of the regulator is crucially important in overseeing and controlling that whole operation in as smooth and efficient way as possible. Nothing, least of all petty quarrels about territorial boundaries, should be allowed to stand in the way of that.
Other areas in the committee’s report are perhaps less controversial, although important nonetheless. They are probably pushing at an open door with the DWP in relation to excessive costs and charges, to consumers getting the best possible value from their annuities, for the setting up of governance committees in contract-based schemes and the need for better communication across the piece.
The DWP will doubtless note some of the committee’s reservations about the proposed ‘pot follows member’ solution to the problem of small pension pots, a concern which much of the pensions industry would certainly share.
Finally, the committee’s clear support for the introduction of defined ambition (DA) schemes with greater scope for risk sharing between members and plan sponsors is especially welcome to Barnett Waddingham. The need to remove legislative and regulatory barriers to DA schemes at the latest by the time the single-tier state pension is introduced and contracting-out ends in 2016 is something that we would fully support.
Today’s report is a welcome contribution to the important debate around how we ensure workplace pensions continue to deliver good outcomes for customers. Effective regulation is clearly a key element and the customer needs to be at the heart of that. The regulatory landscape is complex and any review which harmonises the regulatory differences between trust and contract-based pensions is welcome.
At the end of last year we produced a report, Now we’re nudging, making key recommendations, based on The Pension Regulators’ six principles, to industry and policy makers to help ensure a positive outcome for those who are automatically enrolled into workplace pension schemes.
As we’ve said before, auto-enrolment provides the UK with an unprecedented opportunity to build a savings culture and help people to save and feel more confident about their future. The success of auto-enrolment will not just be measured by the number of people who stay enrolled in their workplace pension scheme, it will ultimately be measured by the results they see at retirement. So the committee has quite rightly highlighted that this puts an increased onus on the industry to ensure that pension schemes continue to deliver for customers.
The committee has identified many of the key risks to good member outcomes and, in particular, we welcome their strong stance including the banning of consultancy charging and AMDs.
In other areas though, we are concerned that good intentions have been coupled with impractical proposals. For example, the idea of giving members a list of all annuity rates available to them at retirement is just going to cause further confusion. Instead, pension providers should facilitate a full shopping-around service.
We welcome any moves to communicate more effectively, providing communications are kept straightforward and concise for members. New ways of communicating through digital media need to be front and centre of everyone’s thinking.
We understand the concern about duplication of regulation, but disagree that there is a governance gap for contract-based schemes. FSA regulation is not the low base suggested by the committee, but an increasingly high bar in terms of both conduct and capital requirements. It is disappointing that the committee didn’t recognise this.
There is a strong case for better coordination between regulators, but suggesting the creation of a single regulator ignores the wider market that pension products sit within. Fidelity, is very supportive of the work TPR is doing on good practice for DC schemes. We recognise that the best route to success is making sure we provide good outcomes for our DC customers.
The committee is concerned about regulatory gaps as there are currently three regulators for the UK pensions industry. Ensuring that there is joined-up thinking in the regulation of the pensions industry can only be a good thing, whether that is by establishing a single UK regulator for pensions or ensuring a closer collaboration. This issue will no doubt be given serious thought by the government.
The committee has recommended establishing governance committees for contract-based schemes. This would echo the trend we have already seen in trust-based schemes. The committee rightly considers that this could increase the effectiveness of governance in these schemes. Recognising that effective governance is often easier for large schemes to achieve through economies of scale, the committee recommends that the government and the regulators investigate ways of assisting employers to set up governance committees, focusing particularly on small to medium sized enterprises.
Member communications are again under the spotlight. Despite the current consultation on the disclosure regulations, the committee has recommended that the government, the regulators and the industry work together to agree on a communications format based on Nest’s communications, which the committee singles out as being ‘simple’ and ‘easy to understand.
Currently workplace pensions are regulated by two entities. Contract-based schemes are regulated by the Financial Conduct Authority (FCA), whereas trust-based pension schemes are regulated by The Pension Regulator (TPR). In the context of DC pension schemes and, in particular, large scale auto-enrolment into DC, this is ridiculous.
Two ‘products’ of fundamentally the same nature are subject to different rules. The risks this approach creates include (a) that there will be gaps in regulation that will be exploited and (b) that the two systems operate differently, thus encouraging arbitrage.
The committees recommendation hits the nail on the head. There should be one regulator, this makes absolute sense.
There are, however, problems. Firstly, the point of convergence for regulation of pensions is the PM, TPR reports to DWP, DWP to the minister, minister to the PM, FCA to the Treasury, Treasury to Chancellor, Chancellor to PM, and he has other priorities.
Secondly, the FCA only started work a few weeks ago. Their priorities are going to be who’s sitting where, not this. Also as a new regulator are they really going to be keen on giving up part of their patch? Thirdly, Bill Galvin, the CEO of TPR is serving his notice. Until his replacement is in place does TPR have a strong enough sense of its objectives?
We welcome many of the recommendations in the report, in particular the banning of AMDs; greater focus on scheme governance, and not just cost; and bringing the regulation of all workplace schemes closer together. We do however have concerns about what exactly is being recommended for consultancy charging.
We strongly believe in the benefits of financial advice. Our experience of automatic enrolment to date indicates that employers are looking for support in the design and implementation of a qualifying workplace pension scheme. Consultancy charging has an important role to play in ensuring that employers have access to this advice and will also support a vibrant and competitive market.
We believe consultancy charging must reflect the services that add value for employees. The range of services that can provide tangible benefit for scheme members include provider selection, contribution design, default investment design, selection and review, member communication, and ongoing scheme review.
Without consultancy charging there is a danger that adviser capacity will be removed from the market, employers will become disillusioned with pensions, implementation of pension schemes will be of lesser quality, and only the minimum pension solutions will be provided.
Ultimately, the automatic enrolment project could fail for many employees.
There are countless reasons why a single regulator for workplace pensions makes sense and we are, in principle, firmly behind this initiative. A single regulator will help avoid confusion among consumers and will plug gaps in the current system, while ensuring more consistency of treatment between trust and contract-based arrangements, something that is not achieved under the current dual TPR/FCA regime.
Given that the infrastructure is already largely in place, we believe that TPR is the obvious entity to take on the role of the new ‘super-regulator.’ Transferring TPR’s remit to the FCA would be much more onerous and could result in a continuing element of dual regulation, by the FCA and PRA.
Regarding charges, clearly these must always be transparent and represent value for money, but the focus has to be on outcomes. The best performing products can have higher charges, but these can still deliver better outcomes for savers than low charges and poorer performance. If delivering positive outcomes remains the focus then for now, we do not believe they need to be controlled through regulation. If the industry does not clean up its act then regulation should and must follow.
Finally, we fully support the Work and Pensions Select Committee’s proposals on decumulation. The exercise of an open-market option for all annuity purchases should be made compulsory to ensure the best outcomes for everyone in retirement.