It was perhaps too much to hope that, while the NAPF was beavering away at its Myners review paper, the well-intentioned folk in Brighton might have compared notes with it on their November 2006 Consultation Document entitled ‘How the Pensions Regulator will regulate defi ned contribution schemes in relation to rights to members.’ After all, Myners took the trouble to draft some Principles for DC schemes too...
Nonetheless, there is some worthy content to the Regulator’s paper, whose overall aim is to clarify ‘what is expected of those running and providing defi ned contribution schemes and back this up with action where necessary’. As such, and because the paper looks at contract-based and trust schemes, employers as well as trustees providers and advisers are all subject to comment by the Regulator.
The paper discussed fi ve key risk areas: poor administrative practices; poor investment practices; unduly high charges; poor decision on retirement choices; and lack of member understanding.
The main tool at the Regulator’s disposal to raise standards is, perhaps unsurprisingly, education and guidance, via the publication of examples of best practice. Other than this, the Regulator sees merit in what it terms ‘partnership working’, ie ‘with Government and other regulatory and industry partners, to identify ways in which we can either support the activities already taking place or provide additional help to ensure consistent messages and support. NAPF watch out!
Of course, the Regulator’s powers of intervention are also mentioned, eg improvement notices might be issued and naming and shaming of professional advisers and providers for poor practices are discussed. Whistle-blowing is also encouraged, although one might query the basis on which this could occur if there has been no breach of the law.
Perhaps more worrying is the threat, mentioned at various points in the paper, that the Regulator may ‘consider the continued appointment of trustees where they fail to ensure good practices’. This seems very heavy-handed and rather an ambitious goal compared to the Regulator’s previous record on removing trustees from offi ce.
So what best practice ideas has the Regulator come up with?
In the administrative arena, it will publish examples of service level agreements covering administration and payroll services (which the Regulator suggests 25% of trust-based schemes do not have in place with service providers), internal control processes and data transfer agreements on the change of a third party administrator.
Investment risks to be addressed by guidance could include how to select and review investment managers and funds and how to design default funds. The Regulator may also publish examples of the best and worst charging structures, helping trustees, employers and members to see how charges can represent value for money. The corollary is the Regulator’s threat to report advisers and providers to the Financial Services Authority where disproportionate charges come to light. In this connection, the paper comments on employers’ responsibilities for contract-based schemes, saying that they ‘need to be fully aware of the costs and charges involved’. This is at odds with the statutory position under the Welfare Reform and Pensions Act 1999 in respect of stakeholder schemes, where employers have a statutory exemption from any duty of care for the selection of a stakeholder provider, except for ensuring that the scheme is a duly registered stakeholder scheme.
Unsurprisingly, the most nebulous but perhaps most important risk area concerns the problem of inertia by members, which the chapters on retirement choices and lack of member understanding seek to address. Acknowledging that the key to helping members make informed choices is primarily a matter of communications and that there is already a host of existing tools (some inspired by regulation on disclosure), the paper ignores some fairly obvious elements in the equation. In particular, there is no assessment of the potential impact of the National Pensions Savings Scheme, although the Regulator did survey the level of awareness (as perceived by trustees that most or all of their members ask) of required contribution levels to produce a decent level of retirement income.
On 25 April, the Regulator published a consultation report containing the key comments made during the consultation exercise. According to that report, the Regulator received over 40 responses to the consultation from a broad cross-section of the industry, most of which were generally supportive of the Regulator’s proposals to take a more active interest in DC schemes.
However, there were some concerns raised, for example that not all the potential risks to members had been identifi ed, that the proposals could lead to an ‘over-regulation’ of DC schemes akin to that already affecting DB schemes and that it would be inappropriate for the Regulator to attempt to drive down charges. The Regulator says the concerns raised will not require it to alter its fundamental approach, although it will modify some aspects to address specifi c issues where it considers it appropriate to do so.
Alongside the consultation report, the Regulator also published a discussion paper on its approach to pension scheme governance in general, entitled ‘The Governance of Work-based Pension Schemes’. The paper sets out the Regulator’s regulatory priorities for scheme governance, namely (a) knowledge and understanding of the trustee body, (b) confl icts of interest and other relationships of the trustee body, and (c) trustee procedures in the context of administration, investment choice and during winding-up. The Regulator says that implementation of these priorities will be principally through the provision of educational material, guidance and examples of good practice. Although the paper is aimed primarily at the trustees of trust-based schemes, it also outlines how the Regulator envisages the above priorities applying to contract-based schemes, including GPPs and stakeholder schemes.