In its sixth report of session 2012-13 entitled ‘Improving governance and best practice in workplace pensions’, the Work and Pensions Committee (WPC) has argued that with the introduction of auto-enrolment in October 2012, much stronger pension scheme governance is needed to protect members of contract-based DC schemes.
The WPC commented:
- Most employees will be auto-enrolled into Defined Contribution (DC) schemes, which often involve a complicated set of costs and charges and may be too confusing for scheme members to understand. Trust-based DC schemes offer members some protection as scheme trustees are under a fiduciary duty to act in the interests of scheme members. However, contract-based schemes allow scheme providers and employers scope to make decisions that may not be in the best interests of scheme members.
- Our tripartite regulatory system – the Pensions Regulator (tPR), the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) – has created regulatory gaps that leave members vulnerable to inadequate and inconsistent protection. The FCA, currently responsible for regulating contract-based pension schemes, needs to establish a stronger working relationship with tPR, adopt a ‘pensions-specific and proactive regulatory strategy’ and set up a more specialist team for the task.
Dame Anne Begg MP – Chair of the Work and Pensions Select Committee – commented that a single regulatory body with sole responsibility for regulating workplace pensions would ‘ensure that all members of workplace pension schemes are given the level and consistency of protection they need’.
The report makes other recommendations for changes to the current system of governance:
- Deferred-member charges and member-borne consultancy charges have the potential to cause serious harm to consumers and should be banned if the industry continues to impose them.
- The Government and regulators should help employers offering contract-based schemes set up governance committees to oversee their pension scheme.
- The Government’s plan to bring in a ‘pot follows member’ system for small pension pots may cause harm to consumers and furthers the need for strong governance and reasonable charges.
- The Government should do more to encourage Defined Ambition risk-sharing schemes.
On the legal issues arising in relation to choosing between occupational (trust-based) DC arrangements and contract (personal) pensions for DC provision, see our Money Purchase Pension Schemes below.
However, at the National Association of Pension Funds regulation conference on 1 May 2013, Sajid Javid – economic secretary to the Treasury – rejected the idea of a single regulator, stating that the division of the FSA into the FCA and PRA was disruptive enough and so there were no further plans to ‘change the regulatory architecture’.
The Pensions Regulator chairman, Michael O’Higgins, also voiced his opposition to the move, stating that ‘if you move the boundary, you just create another boundary, and we would still cross over with the FCA somewhere… My preference would be to concentrate on ensuring the regulators use the principles rather than moving the deckchairs just at the moment’.
The pensions minister Steve Webb and the FCA chief executive Martin Wheatley have emphasized the need for the FCA and tPR to improve their working relationship. Webb argued that tPR and its expertise would be ‘swallowed up’ if responsibility for trust-based schemes was transferred to the FCA.