I am pleased that the Regulator is getting involved (one cheer) and I’m pleased that they are concentrating on outcomes (two cheers) but in terms of execution (too long and complicated) and relevance (the documents could have been written ten years ago), there is a long way to go!
Why, you might ask, am I boring you with a blog about Pension Regulation? Well the simple answer is that most people in this country say and feel and behave on the basis that “pensions are a rip-off”. If they are right – regulation has failed and if they are wrong – it is up to the Regulator to put them right. The fate of retirement savings is very much in the Regulator’s hands and that’s why I bother to write about what the Pension Regulator is getting up to.
The Pension Regulator is primarily concerned with the behaviour of the Trustees of occupational pensions and it’s major concern over the past five years is that many of the DB schemes trustee’s oversee have been running insolvently.
Insolvency is not much of an issue for a DC plan – apart from being light on promised contributions or having assets stolen from its members, a DC plan, offering no guaranteed benefits can only have “good or bad outcomes”.
If you are a Regulator, the urgency of a poor DC outcome is less than the urgency of a failure to miss a guaranteed payment. Consequently, DB plans have got all the attention and the regulation of DC plans has been a Cinderella activity.
This is beginning to change and change fast. Sitting on my desk this morning are seven documents form the Regulator
Principles and feature for good quality pension schemes APPROACH DOCUMENT
Ensuring good governance and administration in work-based defined contribution pension schemes -REGULATORY APPROACH
Governance and administration of occupational defined contribution trust-based pension schemes – REGULATORY APPROACH
Governance and administration of occupational defined contribution trust-based pension schemes – REGULATORY GUIDANCE
Governance and administration of occupational defined contribution trust-based pension schemes – CODE OF PRACTICE 13
Regulating work-based defined contribution pension schemes CONSULTATION DOCUMENT
Trust-based pension scheme features research
There is also a lengthy press-release!!!
There are three reasons why the Regulator is donning new clothes.
- Auto-enrolment has propelled DC up the political agenda. Either DC plans work for the 11m people being cajoled into them, or a major Government policy initiative will fail and the country will have fallen even further out of love with providing directly for itself in retirement (rather than being bailed out by its children)
- The FSA is being broken up and replaced by new regulators the FCA and PRA. In the Regulatory vacuum many hope that the Pension Regulator will step up and become lead regulator for all workplace pension arrangements.
- The Retail Distribution Review and Auto Enrolment have together shifted the emphasis from “distribution” to “outcomes”. Historically the FSA have regulated distribution and the Pensions Regulator has regulated outcomes.
- The Pension Regulator has woken up to the possibility that in 20 years time, it will be extinct, the liabilities of the remaining corporate DB plans having either been shifted to the PPF or to insurers.
In principle I support the Pension Regulator’s approach. We are seeing a shift from sales based to outcome based regulation , DC is becoming the principal source of non-State-based pension provision and the skills and experience for pension regulation sit in Brighton not Canary Wharf.
But boy is the process painful. Reading through the four “approach” documents is an exercise in futility. These are public documents but really only of interest to other Regulators and for the various Government Departments responsible.
There is some interesting stuff to advisers like me, most especially in the sections that look at the trustee’s responsibilities to moderate the behaviour of employers. Within the Regulatory Guidance documents there are suggestions that trustees may concern themselves in a variety of corporate decisions including suggesting the aggregation of legacy DC plans to achieve economies of scale and the setting of the employee contribution rate for those auto-enrolling (to ensure the employer does not disincentivise employees from joining the Qualifying Scheme).
These duties will be of particular interest to employers deciding on whether to go contract or trust based. Will we find new battles between trustees and employers and how will Regulators unwittingly drive some employers away from mastertrusts towards insurers offering contract based plans?
It is very important that the stated aim that the roles of those who govern trust and contract based plans are aligned so that we do not get employer decision making based on a new form of regulatory arbitrage. Clearly this is the Pension Regulator’s stated aim – another reason I support it’s approach.
I am not impressed by the volume of the output. There are a huge number of words here and a massive number of statements. There is too much on “approach” and too little hard metrics on what will and won’t be allowed into the definition of an auto-enrolment Qualifying Scheme.
We started out with a good document written in November 2011 that identified 6 things that made for good outcomes from DC pension plans. We are now up to 31 “characteristics”. Substituting 31 for 6 has has not made things 5 times better, it has made things worse.
No doubt, the technical teams fo the consultancies will pour over these documents and pick holes in inconsistencies, lawyers will send out briefings to clients warning them of the likelihood of future breeches and the pensions industry will lick its lips at the prospects of more fees ensuring everyone is properly informed of what this all means and why everything must be reviewed (again).
But there is too much. We need simplicity at this stage so that the 1m or so employers “new to the game” and the 11m or so employees “new to the game” are impressed by what they get and not repelled by over-regulation.
The Regulator now points to the 31 characteristics and explains that most small scheme Trustees only get to the first three while large scheme trustees can tick 25 or more boxes. On this basis the Regulator feels justified in asserting that most small DC schemes aren’t suitable for auto-enrolment.
But that’s rubbish regulation. Good regulation concentrates on outcomes not characteristics. Small scheme trustees will hand over their responsibilities to large scheme trustees (mastertrusts) not because they are told to, but because it is in the interests of the members to do so. I am sure this will happen over time because markets ultimately converge around efficiency, the Regulator’s job is to make it happen easily and to stamp out blatant bad practice.
If I have one hope for the Regulator, it is that it gets out and talks to the employers who have staged auto-enrolment and the Providers who have helped them. Much of what I have read over the past 24 hours could equally have been written five years ago. But the world has moved on, especially the way we engage with each other has moved on. Reading the sections on employee engagement, I wondered whether they had been written in 2003 or 2013.
The sections on how members engage with their pension planning are so arcane, I wonder if anyone who works for them has ever held a mobile phone! Members engage with money through websites like moneysavingexpoert, moneymail and Which via laptops, tablets and handhelds. They do not rely on information sent by trustees through their letter boxes. Hopefully the Regulator will get wise to this at some stage of their forthcoming consultation , or remain irrelevant (at least on this)!
Simplicity and Relevance are my two regulatory watchwords. If we have regulation which is simple and relevent, we will have a framework in which auto-enrolment can be a success. The seven documents I have just read are well written and are undoubtedly pointing in the right direction. But in terms of execution, they could be a lot simpler and a lot more relevent!
- Right direction – wrong speed! Defining a “good” workplace pension. (henrytapper.com)
- Time to get tough on “dodgy” pensions – the Regulator speaks (henrytapper.com)
- A chance to keep companies with DB pensions solvent (henrytapper.com)
- Workplace pension providers demonstrate scheme quality for savers (dailymail.co.uk)
- New pension standards outlined (telegraph.co.uk)
- A defined ambition scheme that would work (henrytapper.com)
- Don’t enrol small pension schemes with high charges (thisismoney.co.uk)
- All change on pensions – a positive outlook for 2013! (henrytapper.com)
- Pension protection needs clarity – Confused.com (confused.com)
- “Pensions aren’t dead yet!” January pension play pen lunch (henrytapper.com)