Pensions are easy!

Over the next five years, some 1.2 million companies will introduce auto-enrolled pensions. One of the “employer duties” is to select and certify a pension scheme as “Qualifying” for auto-enrolment.

The DWP has made it clear that they will use the Regulator’s powers to disqualify schemes which it doesn’t consider up to the task.

In an important speech, Michal O’Higgins , the Regulator’s Chair, has outlined the Regulator’s direction of travel.

So far, all the schemes certified by the early stagers have not been challenged. The Regulator has divided the workplace savings market into five sectors

1. large employer-sponsored schemes

2. multi-employer schemes (‘master trusts’)

3. medium and small schemes

4. micro schemes

5. work based personal pension schemes also known as contract-based schemes.

The schemes set up so far have fallen into categories 1, 2 and 5 which the Regulator are most relaxed about.

Of the segments of the DC market that we have identified, we expect large employer-sponsored schemes, ‘master trusts’, and contract-based schemes to be the best equipped to deliver good outcomes for auto-enrolled workers.

But there is increasing depth in the Regulator’s analysis. Just because you are a large employer or use a contract-based scheme, does not mean your scheme will find favour.

“ The best outcome for these individuals is to be auto-enrolled into high-quality, value for money schemes, benefiting from scale and good governance. This simple truth is at the centre of our regulatory approach, and we will encourage the provision of schemes displaying the features necessary for good outcomes. More small schemes are not the answer, however.

“So I want to say explicitly today that, in our view, workers should not be automatically enrolled into smaller schemes which do not benefit from economies of scale, tend to be poorly run and do not deliver value for money in the charges they make to members.

“We also don’t want to see auto-enrolment into legacy schemes operating on old administration platforms with higher charges and outmoded default funds; or into schemes that are themselves good, but that require a higher level of financial literacy such as Self-Invested Personal Pensions (SIPPs) or Small Self-Administered Schemes (SSASs). The latter would put workers in the position of being the trustee of their own scheme.”

This leads O’Higgins to this conclusion

All employers must review their pension arrangements: either choose a new offering for automatic enrolment, or work with their existing provider or trustees to adapt their current scheme to qualify.

The Regulator have made some half hearted attempts to give employers guidance on how to go about such reviews. You can read the guidance here . However the guidance is high-level and doesn’t give much practical help to trustees or employers as to how to their scheme in shape.

This presents the market with a problem. The Regulator is calling for industry views on definitions of “good” and standards that might be incorporated into a kitemark or “quality flag”.

So many of the employers certifying schemes for q1 and q2 2013 will be certifying “blind”.

They need to scrutinise the DWP’s statements of intent, most especially in the Reinvigorating Workplace Pensions document where the intention could not be clearer

“we are monitoring charges, including consultancy charges, very closely and have been clear that we will take prompt action if we see evidence that charging structures are being used inappropriately or if charge levels are excessive. We have powers to stop a scheme from being used for auto-enrolment if its fees are too high or if members are required to pay for anything which doesn’t deliver them a pension benefit. We could take action within months so the industry has every incentive to do the right thing. We are keen to continue to develop the monitoring regime for charges, which currently consists of a regular survey of trust and contract-based schemes, to ensure that we have a robust evidence base to assess whether self-regulation is working and continues to be appropriate for schemes being used for auto-enrolment.”

Taken together, the statements from the Regulator, building on the DWP’s Reinvigoration paper suggest that we are not far from a charges cap at 0.50% pa which is mentioned as the new “baseline level” in that document.

For a number of reasons, not least the impact on Solvency II reserving, the Government would be well advised not to formalise the cap as they did with Stakeholder charges.

They seem to have learned that lesson and are now talking about an approach based on “comply or explain“. I do not agree that an explanation can be tucked away in the pension scheme report and accounts (as suggested by O’Higgins). If the DWP are serious about their “consumerist” agenda, they’ve got to get the charges debate into the public arena.

That means a better understanding of what charges are, why they matter and how people can feel confident that they are not being ripped off.

Similarly we are going to have to be clearer about what constitutes a good investment strategy within a default option , clearer about what good retirement options mean and clearer about the aspects of governance that engage people in their pension scheme.

I like the rhetoric, what the DWP and tPR are saying is going in the right direction.

I now hope they can keep their foot to the floor so that companies and trustees staging next year can get it right first time.

Related articles

• Time to get tough on “dodgy” pensions – the Regulator speaks (henrytapper.com)
• Don’t enrol small pension schemes with high charges (thisismoney.co.uk)
• Workplace pensions: A guide to auto-enrolment (confused.com)
• Don’t enrol small pension schemes with high charges (dailymail.co.uk)
• A chance to keep companies with DB pensions solvent (henrytapper.com)
• The public sector needs a low cost pension alternative (henrytapper.com)
• RDR and AE – what future for commissions and advisor-charging? (henrytapper.com)
• What Steve Webb must do now. (henrytapper.com)
• DO GPPs need governance committees? (henrytapper.com)
• What do we mean by good? (henrytapper.com)