Our vision, shared by government, is that, over time, all workplace schemes should become full-service providers. This would involve providing services for saving into a pension, accessing pension savings and post-retirement support.

Lou Davey- TPR November 2023

Yesterday, I re-blogged, with  TPR’s permission,  an important statement of intent from the Regulator on closing the gap between DC and DB pensions. 

The concept of “full service provision” is a new one. Most workplace pension schemes are only partial service providers, they offer services to savers to retirement and then provide a signpost to further services such as annuities, drawdown or the facility to cash out. If no third-party service is taken up, money is typically invested in a “de-risked” investment strategy, anticipating settlement of the account, To use the language of DB pensions, there is no “run-on” option where the scheme pays a stream of income payments to the saver and certainly no offer to pool both assets and risk to provide collective pensions.

The sponsors of DC pensions – the employers – have historically fought shy of involving themselves in being seen by their staff as full service providers. They have been put off doing so by the risks that reverted on KPMG when it set up a target pension for staff, where the target was assumed to be a defined benefit, both by staff and the courts. DC liabilities are limited to the contractual or regulatory obligation to pay contributions, not pensions.

Employers, who continue to offer their own DC pension schemes under an occupational trust are not being expected by the Pensions Regulator to in time do more than signpost. They are being expected to manage the “decumulation” of member’s pots on the scheme’s balance sheet. To be technical, rather than transferring money into an annuity or SIPP run by a third party, the scheme is expected to manage disinvestment from the trustee’s investment plan. Clearly , this presents an additional risk to employers – the KPMG risk,

I consider the Pension Regulator and Government’s position on this – while at the moment a “vision”, likely to become an obligation on workplace “pension” schemes. The term “pension” has within it the expectation that a pot will eventually turn into a stream of payments paid over a saver’s remaining life.

“Post retirement support” is another novel and challenging phrase. Most employers do not consider they have an obligation under DC to support former staff who are now working elsewhere or not working at all. But the fiduciary duty on a trustee is to treat all members fairly and equally. This duty was reinforced by the banning by the Government of cross subsidies know as the “active member discount” that enable those in active employment to get a cheaper service than those who had left service.

Members of occupational pension schemes who are in service, can expect a degree of support by way of payroll contributions and a duty to ensure that contributions are recorded and invested with due care by the scheme, The Pension Regulator has powers to enforce the proper payment and collection of contributions – but not the ongoing administration of the scheme, What it is saying is that it wishes in time to ensure that the scheme not just takes money but pays it back, with due care.

The Pensions Regulator is not saying that to be a full service provider, all the work must be done within the scheme, that would be to suppose that the scheme would need to take charge of the annuity (effectively a buy-in) or operate a CDC or even buy-back pots into a DB section. While nothing is stopping schemes taking on extra-risk, the regulator is suggesting that signposting to partnerships will continue.

But the partnerships look to me to be more than a hyperlink to an annuity broker or SIPP, the retirement products are part of the scheme offer, whether managed internally or externally. This suggests that VFM assessment will eventually extend to what happens with the partner- as well as within the scheme.

the long-term expectation is that all schemes should offer retirement products either directly or through partnerships. Modern workforce pensions that offer accumulation and decumulation. If schemes will not or cannot make that offer, they will come under pressure to consolidate.

The blog extends beyond the comments made by TPR’s CEO , Nausicaa Delfas and suggest for the first time , that the Pensions Regulator is considering extending the fiduciary duty beyond the accumulation phase so that DC trustees will ultimately be responsible for outcomes in retirement. And if sponsors don’t like the sound of that, they should be consolidating their pensions to master trusts where the liability is with the commercial provider.

Whether the commercial providers are up for providing to and through retirement services is another matter, one that will exercise the minds of trustees, providers and those who fund the master trusts,

Louise Davey