Pension PlayPen Ltd trades as www.pensionplaypen.com and is the leading portal through which employers access information to stage auto-enrolment. The site allows employers to assess their workforce, determine a contribution structure, apply to workplace pension providers for terms and choose the most suitable provider.

This response has been written by Henry Tapper, Founding Editor of Pension PlayPen. Pension PlayPen has a significant shareholding in First Actuarial, a company of which Henry is also a Director.

First Actuarial is responding separately to Pension PlayPen but our responses are driven by a common purpose – improving member outcomes.

Summary

 The Pension PlayPen is happy to respond to the DWP’s Command Paper “Further Measures for Savers”. It was a pleasure to read and it is a pleasure to respond.

The focus of the paper’s thinking is the “member’s interest”. As with the FCA’s “treating customer’s fairly”, this phrase must become the touchstone for DC governance. We wold urge the Government to continue banging on this drum.

The Paper sets out a governance framework for DC workplace pensions that we think is workable and effective. It will be tough on small occupational schemes and will ensure that only the most committed master trusts and contract based providers offer Qualifying Schemes.

While this is tough, it is fair. As we mention later in this response, consolidation is happening in other countries, most notably in the Netherlands. The economies of scale granted large schemes are essential for savers. Only with scale can we sustainable levels of service and value for money backed up strong governance.

The current system which relies on governance at employer level is not tenable even for the 10,000 employers who have staged auto-enrolment. A new system is needed for all but the largest employers and crucial for the 1.2m employers still to stage

You ask for views on the potential benefits of accreditation of administrators and what role Government and regulators could play in supporting this.

We agree with proposals mooted recently by tPR (a code of assurance and reference to PASA standards). Pension administration is a low-margin high risk business and is one of the few areas of financial services that has a truly transparent fee structure. Minimal reform is needed but promotion of best practice is to be welcomed. So rather than reinventing the wheel, we would want reform to refer to Margaret Snowden’s excellent work with PASA.

We would support this job being given to PISA who have down ground-breaking work on standards. There is a need for Origo and TISA to work with PASA to create a framework that includes both insured and non-insured contract based plans. We would also like to see the CIPP and CIPD provide input to any standards.

Clear leadership is needed here and Margaret Snowden and her team have already demonstrated their capacity to set standards (with the code of conduct for Enhanced Transfer Values).

You welcome suggestions of other approaches to helping trustees and IGCs ensure that their scheme is being administered to a good standard. 

As discussed above, there are a number of other organisations with skin in this game. Each could make a case for leading but neither Origo nor Tisa can bring the depth of understanding and a track record of leadership shown by PASA.

We would strongly argue against the setting up of a Government Body to set and control administrative standards. The skill set doesn’t sit within any Government department and the depth of technical understanding needed to both establish standards and develop them over time is too specialist a job for BSI or similar standard setters.

We see scope for nationally agreed service standards and a framework Service Level Agreement (SLA) which can be signed up to by any administrator wishing to be accredited to run Qualifying Workplace Pension (QWP) arrangements.

By way of example, the requirement on IGCs that “core scheme financial transactions are processed promptly and accurately”, requires metrics on what timescales define “promptly” and what tolerances define “accurately.

This can be across the board, master trusts, single employer trusts and contract-based arrangements can work to a single SLA.

You ask whether master trusts should have to meet the same independence standards as providers of contract-based schemes?

They should; currently the door is open to any commercial organisation to sell “vertically integrated” product to employers bypassing many of the FCA rules and with little regard to the fiduciary obligations that underpin trust-based provision. We are currently seeing an explosion of such master trusts offering Discretionary Fund Management (DFM) from financial advisers.

The barriers to entry are ridiculously low and the potential for consumer detriment is high. Master trusts should be treated “for QWP purposes” with the same regulatory rigour as IGCs

We hope that when the FCA completes its work on the governance of contract-based plans, it will draw the same conclusions and implement the same standards as are proposed for trusts in this consultation.

You would like views on the proposed definition of ‘independent’ at Annex B.

We agree that the balance should be with independents but we think 7 is too many, we think 5 is better. Better decision making results from smaller groups- there is little extra wisdom from seven.

You ask whether the independence requirements be applied in different ways to different models of master trust. In particular, how should the independence requirements be applied to master trusts that use an independent trustee firm to act as their corporate trustee? 

We are very concerned that independent trustees could become little more than Fiduciary Managers, opening the door to regulatory arbitrage. There is a need for diversity on a trust board and no matter how “arms-length” an independent trustee may claim to be, the act of appointing one in a corporate capacity (without the diversification of other viewpoints) is disquieting.  The problem is exacerbated by there being no formal qualification for independent trustees.

You would like views on the proposed quality standards for trust-based governance which are summarised at Annex B 

We are impressed with Annex B which looks to be comprehensive. We hope that this more principled approach will supersede previous frameworks (especially the 31 DC Characteristics and the 6 DC principles which don’t do it for us. We like the 6 Good DC outcomes which preceded these latter documents- precisely for the reasons we like the quality standards in Annex B- they are governable!

Our suggestion for improvement is presentational. “Acting in members’ interests (both active and deferred)” should be at the top of the list and should be the guiding principle that covers all duties (whether for trust boards or IGCs)

You ask if the requirements listed at paragraph 8 are the right quality standards to be set in regulations for trust-based schemes? 

We think they are the right requirements. We would welcome more detail on enforcement because we have seen such rules flouted in the past.  A strong approach to enforcement, especially on rules governing conflicts are imperative, the temptation to use trust based schemes for purposes other than the member’s interests will otherwise prove overwhelming (as has been proved often in the past)

You ask whether trust-based schemes be required to have a chair of trustees? 

Yes, there needs to be accountability and the Chair should be the spokesperson. We like the independent audit that assures the Chairman’s report is meaningful and accurate. We expect the report and accounts to be published in a meaningful way. This is one area that social media can and should help.

You ask whether the new reporting requirements help drive compliance with the standards and regulation of these? 

They will do two things, firstly they will focus minds and ensure delivery, secondly they will be too onerous for many trust based schemes (and maybe some contract-based providers). If this means consolidation in both sectors of QWP, then we are for it. There are too many schemes taking up too much resource for the good such proliferation does.

We note that in the Netherlands, the number of Pension Funds has almost halved in the past five years and with 60 schemes in “special measures” and a similar number in the process of wind-up, it is expected that the total number of funds will be around 100 in three years.

In the UK there are 40,000 occupational schemes and a further 2600 contract based arrangements. We are not sure how these contract based arrangements are defined but we think there are too many of them.

If, as we suspect, the definition of contract -based schemes is that they have registered themselves as single employer stakeholder arrangements, then the principal governance issue is that these schemes may have an employer defined default fund. The Command Paper is silent on this issue but it is important.

Many employer defined defaults will be different to the default considered by the IGC (the default default). In our view, contract based plans should offer a single default and employers should not be offering their own variant unless they themselves will operate an IGC.

We think it unlikely, faced with the onerous duties of an IGC,that many employers would persist in running their own default.

While this is beyond the scope of this consultation, we hope that the DWP will pass on these comments to the FCA. The same approach should apply to trustee selected defaults of single employer default funds (many of which are not fit for purpose).

You welcome views on whether the transparency requirements we propose for DC schemes should, in the future, be extended to DB schemes, to enable sponsoring employers to further scrutinise the costs of such schemes. 

We think this will happen as a matter of course. Many of the pooled funds used by DC schemes are also used by DB schemes (especially smaller DB plans). Larger DB plans know (or should know) what they are paying by way of transaction costs. Smaller DB plans will be able to find out what they are paying through information in the public domain as a result of DC IGC and Trustee disclosures.

It may be sensible to require trustees of DB plans to pay the same attention to transaction costs as DC trustees but the imperative of member protection is not so strong when the transaction costs are being passed on (via a balance of costs arrangement) to the employer. We would expect most employers to be considerably more vocal about cost management than the average DC member!

You welcome views on how these transparency requirements could be made to work effectively in unbundled trust-based arrangements (including master trusts).

One of the problems with workplace pensions is that asset managers have not seen themselves as fiduciaries in their own right. Consequently they have been more focussed on marketing their product than on the product’s outcomes. This has led, in some cases, to a focus on headline wins “stock selection, asset allocation” without regard to the costs of implementing trades.

By turning the microscope on the trading costs of fund managers and demanding they are fully reported to trustees, fund managers will be required to pay attention to what really matters to members, the performance delivered (net of all costs).

But this will also require trustees of DC schemes to be aware not only the importance of transaction cost management , but to be able to measure whether they get value for money from the transaction costs borne by members.

We continue to support the measures outlined in our earlier submission to the Reinvigorating Workplace Pensions paper which goes into some detail on this.

In conclusion

We are very pleased we will have the opportunity to discuss these matters further with the DWP.

Henry Tapper

April 2014