The National Audit office has published a report on the regulation of defined contribution (DC) pension schemes, which has concluded that there is insufficient accountability to ensure that the regulatory system delivers value for money.
The report:
- Highlights the taxpayer’s substantial interest in the effectiveness of pension regulation. The trend towards DC pension schemes increases longer-term risks to the taxpayer, because members are, on average, likely to achieve considerably lower levels of retirement income than those with predominantly defined benefit (DB) pension schemes, and the state is ultimately liable for providing a basic income for the elderly.
- Notes that The Pensions Regulator (TPR) has adopted a sound approach of aiming to regulate in a targeted, proportionate and risk-based way, and that its evidence base is improving. It also concludes that TPR has achieved some improvements in the administration of schemes.
- Recognises that the measurement of regulatory outcomes is challenging. However, TPR’s current system of performance measurement does not make it possible to judge whether TPR is effective in protecting members’ benefits, which is one of its strategic objectives.
The report also highlights that there are four public bodies participate in a senior-level group on DC pension schemes: the Department for Work and Pensions (DWP), TPR, Treasury and the Financial Services Authority (FSA), but there is no single body leading on regulating schemes, setting objectives or measuring performance.
This lack of a joined-up approach also means that there is insufficient basic information available about the market, such as definite numbers of scheme members or the levels of fees and charges they face.
Amyas Morse, head of the National Audit Office, said: “It is not possible to judge how well The Pensions Regulator is doing to protect the benefits of members of work-based pension schemes. This is all the more significant as the trend towards membership of such schemes accelerates.
“While TPR’s overall approach is sound, its performance measurement system is not strong enough. Responsibilities for regulating pensions are shared, and the agencies involved need to develop a concerted approach to assess and, where necessary, act upon risks.
“The DWP and Treasury should therefore work with TPR and the FSA to develop a more integrated approach to collecting evidence, assessing risks to members, and measuring the effectiveness of pension regulation.”
Neil Carberry, director for employment and skills at the Confederation of British Industry (CBI), added: “Enabling people to take ownership of their retirement planning and prepare effectively for old age is vital to ensuring both our public and private finances are sustainable in an ageing society. Tax relief on pension contributions is fundamental to this, and underpins auto-enrolment.
“With DC provision, the size of your pension depends primarily on how much you save. But we also need to support savers to make the right choices on investment, including charges, at the different stages of their life.
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“Good scheme governance arrangements, such as transparency, accessible language, and appropriate investment options will help give individuals the information they need. However, this should remain a matter for scheme providers, because taking a legislative approach would risk further confusing what is already a complex issue.”
Read more articles on defined contribution (DC) pension schemes
The recommendations highlight the confusion created by our current regulatory structure, with no one department or regulator responsible for DC pensions. This creates confusion for practitioners and, most importantly, pension scheme members.
We need to slim down the regulatory framework and have a single regulator for all workplace pensions. In our view, The Pensions Regulator should be responsible for all DC pensions, whether trust-based or contract-based. Prudential regulation for insurance companies and pension providers would remain with the FSA.
The NAO report shows that there is over £380 billion invested in defined contribution pension schemes in the UK, an amount that is set to increase dramatically when automatic enrolment is introduced later this year, and Nest is ready to fulfil its role in managing this.
The NAO also rightly points out the important role that low charges and high standards of governance can play in ensuring good outcomes for members, so it has never been more important that employers and members have access to quality pension schemes.
It sounds obvious, but the effectiveness of the trustee board can have a significant impact on the ability to provide better outcomes for members of trust-based defined contribution (DC) schemes.
In some cases, a step change may be required because many trustee boards have understandably focused more on the defined benefit (DB) sections of their schemes to date.
Improving the quality of governance of all DC schemes, whether trust or contract, to optimal levels is likely to have a strongly positive impact on outcomes for members. Useful measures to take include ensuring trustee boards or governance committees have the skills, knowledge and expertise specific to the governing of DC schemes.
Where trustees govern schemes with both DB and DC benefits, they need to recognise that the skills needed to oversee the DC section can be very different from those required in relation to the DB arrangement.
A regular assessment of the performance of the board or committee within a spirit of continuous improvement, rather than as a tick-box exercise, should achieve better accountability to members within the current system.