The last few days has seen a number of surprise developments culminating in a proposed amendment to the Pensions Act 1993. Poor fare for a thought piece? Read on!
The original proposal for a wording proposed by Lords Lawson and Freud was adopted in an abridged format by the DWP with a key twist. Whereas the Lords proposed disclosure to Workers, the DWP referred to the definition of “person” in the 1993 Act.
Herein lies the nub of the issue. What should be disclosed and who should it be disclosed to? The agenda of retail regulators since A Day back in 1987 is to disclose to the policyholder, the Pensions Act has always concerned itself with trustees and disclosures have assumed some knowledge and understanding.
For the disclosure of fund costs to have impact, the information itself must be relevant and those in receipt of the information must have the capacity to deal with it. The DWP have subtly redefined the recipient and in so doing, made the nature of disclosure, entirely different.
What then is the purpose of this disclosure? Well, for it to work, it needs to define not just what has happened, but what should have happened. There need to be benchmarks against which these fund costs are measured and where those benchmarks are set will be an extremely contentious issue.
For the benchmarks to be meaningful they will need to measure against a wide data set using sophisticated techniques. The skillset to devise these benchmarks and to implement the reporting against them is going to be challenging. That the DWP are prepared to take on this challenge is encouraging.
Even more ambitious is the plan to disclose this information into a market of some 20m workers and 1.2m employers. It is understandable for the DWP to be coy about the status of the “person” to whom disclosure should be made. By its own admission, many of the governance structures of its 40,000 registered occupational schemes are not fit for current purpose, let alone to take on the analysis of this level of data, in practice, only the largest trusts and mastertrusts are likely to have existing competence to make sense of and act upon this kind of reporting.
It is doubtful whether such an ambitious set of disclosures would have been countenanced for contact-based plans without the prospect of Independent Governance Committees. The establishment of these IGCs by the middle of this year is now made all the more essential. The ABI should recognise that though the IGCs will need to be properly resourced to deal with these disclosures, they will not be “self-harming”. The insurance companies who run contract based plans do not directly manage the funds.
The greatest challenge from these new disclosures is to the managers of the funds sitting on the insurance company platforms. It is not the ABI who have most to lose but the IMA. But paradoxically, the fund managers have, till now, born none of the risks of auto-enrolment- they have simply awaited the arrival of increasing cash flows. The DWP’s amendments are likely to change that and put the governance focus firmly on their activities. This can only be to the long-term benefit of workplace pensions.
This post first appeared in www.pensionplaypen.com/topthinking