Take a look at this table (reproduced with the express permission of the Pension Regulator).
It tells us that we have too many private sector trust based DC schemes (it also tells that we don’t know the difference between a GPP and DC contract based scheme but that’s for another day!).
Why does this matter? Because the costs involved with maintaining 37,960 occupational DC scheme is so burdensome that they are creating an impediment to the new world of workplace pensions we know as “auto-enrolment”
Here is what the Pension Regulator wants to happen to ensure that proper consistent governance is maintained throughout.
That’s a lot of governance.
More governance than can possibly be borne by small employers funding the maintenance of trusts charged with absorbing the Pensions Acts, implementing and maintaining Minimum Quality Standards (the charging cap etc), producing a voluntary governance statement to independent auditors, signing up to new codes of Assurance and finally answering to the Pension Regulator on all of the above (gulp!).
I’m not a fan of long sentences but I hope the syntax suggests just how indigestible these new duties will be.
I am quite sure that many independent trustees will be looking at this with some glee. As I have stated in a recent article, the business of compliance makes commercial sense, provided that employers are prepared to stump up for it.
And this little table breaks down what the duties of these occupational DC trust boards are going to be. This goes way beyond the traffic lights of the 31 good characteristics, these duties are going to consume consultancy fees at an alarming rate and encroach upon internal management time which might otherwise be devoted to running the business.
I am not saying that these duties are not absolutely necessary to properly running a scheme, but I am saying that repeating this job 40,000 times is likely to have a negative impact on our private sector productivity and profitability.
We cannot have 40,000 cheap ,well governed pension schemes in the UK. The Dutch have 350 and reckon that is three times too much.
So many schemes keep so many scheme secretaries, independent trustees, consultants, administrators, auditors, fund salesmen and customer relationship managers in a job.
But they do not add anything to member outcomes. In fact they are already severely restricting the capacity of their sponsors to fund contributions as every pound spent on governance is a pound not invested.
They are , for the most part , vanity projects. Established to encourage recruitment and retention of staff, they say to stakeholders that the employer aspires to be the kind of company that can afford to run such schemes. If you are a major retail bank and spreading costs across 100,000 staff, you can run scheme governance like this, but if you bash metal in Dudley with a £10m turnover- you can’t.
As the title of this article suggests, we need to restore trust in pensions; we need more trust. But we don’t need to bleed the system dry by running so many trust based schemes.
While many of the 40,000 are set up for the private use of the owners of the company, a huge number are still in charge of the pensions of current and former staff.
These schemes have a stark choice facing them this year;
Either they get their governance in order or they fold assets into a master trust or allow individuals to take their pots into personal arrangements.
Either way, a proper cost benefit analysis of the merits of continuing to run a trust based occupational DC scheme must start and finish asking the question “is it in the member’s interest?”
This article first appeared in http://www.pensionplaypen.com/top thinking