“Comply or explain” – will “bottom up” regulation work for pensions?

race to the bottomComply or Explain” is a phrase that crept into the “corporate governance” lexicon after the 1992 Cadbury report.

The idea’s that rather than demand compliance with Government standards, regulators give companies the option to comply or explain why they haven’t.

In the world of corporate governance, sanctions for non-compliance are as likely to be dished out by angry shareholders as a Government agency.

The theory is wrecked in practice, if shareholders allow the managers of the companies they own to ride roughshod over good practice and don’t even ask for an explanation. This is why shareholder activism has become such a hot topic.

The Government and its Pension Regulator, are now talking about “comply or explain” to their behaviour in establishing workplace savings schemes in readiness for the auto-enrolment of their staff.

The big question is not whether companies comply or explain – most will, but whether they will be shamed if they don’t.

The main area of contention is likely to surround the quality of the workplace savings scheme offered to staff. There is little discretion for companies around who to enrol, who to offer contributions to and how to manage opt-outs and re-enrolments. But there is little prescription on the quality of the pension savings scheme they use.

So far, the Government’s stated aim of operating a Quality Mark has been sketchily outlined. We know that the Regulator has identified 31 characteristics of a good scheme which are underpinned by 6 principles but frankly even pension experts are struggling to translate these principles into best practice.

Everything boils down to what members can be expected to pay for the pension savings scheme. The Government is hinting that a total charge to cover the investment, administration and communication of the plan should not exceed 0.50% of the member’s pot per year.

Charges matter; high charges can reduce the amount of pension a youngster can expect by as much as 30%. While charges aren’t everything, they are the one measurable that all people can get their heads round.

The Government point to their own pension savings plan, NEST, which will offer these services within the charge and the implication is that companies who don’t use NEST and are asking members to pay more, need to explain why.

But is their any counterparty who is going to demand this explanation?

Trade Unions are the obvious candidates but unions have little representation among the bulk of the 1.2m companies who will be staging over the next five years.

If not employee representatives, it looks like employees themselves will need to kick up a fuss.

For this to happen , three things are going to need to change

  1. The Government are gong to have to clearly state what the benchmark for good is. This cannot be 31 characteristics – it needs to be something simple – it needs to be a single charge, clearly stated.
  2. Employees are going to have to understand the implications of paying more and feel that they can apply pressure for better without prejudicing their job prospects
  3. Their needs to be a penalty to employers if they neither comply or explain. The obvious penalty is for the Regulator to disqualify the intended pension scheme from being used for auto-enrolment.

Is this pie in the sky? Well things are going to need to change, especially among employees. Can we seriously expect normal people to take action to improve their pensions? I think we can.

Over 4m people have downloaded the templates on www.moneysavingexpert.com to make a claim against those who sold them PPI. 11.8 m have signed up for Martin Lewis‘ weekly mail. When people have a clear idea of the benefit of taking action, they will.

The difference between a PPI claim, or a petrol voucher is that the benefit will be in the claimants hands within days,weeks or months. The impact of improved pensions won’t be felt for most for years.

This is the challenge facing those of us who have to practically implement these new schemes. Auto-enrolment has one great advantage for us, it immediately engages those enrolled because they are materially impacted in “days, weeks or months”. The moment when people get serious about pensions is the moment they realise they are paying into one.

If we can get people to take the imaginative step of anticipating the loss of earnings, then we may get them to involve themselves in the planning process so that companies are shamed into getting their schemes “right first time”. This is considerably better than companies having to rip up plan A for plan B in the early months of the plan’s operation.

I have no idea whether we will get to a level of consumer awareness where all employees are familiar with what an annual management charge means. I am pretty sure that the charge concept will only work if people understand that high charges mean less money and have a simple idea of what “high” means.

But I am surer that companies , provided that there is a simple way of complying, will do so rather than run the risk of being shamed by their own staff.

Fortunately, it will be possible for virtually every company staging auto-enrolment to use NEST and it looks very likely that there will be other choices that offer schemes of comparable quality at a comparable price.

This being the case, it is time for everyone, Government, advisers, consumer organisations and employee representatives to start getting the message out.

Within the past few days we have finally got the assurance from 14 of the major providers of investment services to these plans, that they will (at last) properly disclose the costs of the investment. This means we will be able to make meaningful comparisons of the charges under the various pension offerings available to companies.

The ground has been prepared, the seeds sown, it is now time to nurture our garden so that when these pensions come to maturity, they can provide the retirement nourishment people have been promised.

Will “comply or explain” work? It will only work if employers are generally concerned to make it work, and for that to happen both the Government and the consumer need to get stuck in.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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