Back in April the Work and Pensions select committee recommended a single regulator for workplace pensions, following severe criticism of the Financial Services Authority (now the Financial Conduct Authority), one half of the dual regulatory structure, alongside the Pensions Regulator. I blogged about the issue here at the time.
The government has now responded – they appear to have flatly rejected the committee’s advice. This is unwelcome news on the eve of DWP’s triennial review of the Pensions Regulator. But a closer look at the response suggests changes are afoot.
On the prospects for a single regulator, the government says
We believe that the overall regulatory architecture is sound and, given there will always be a boundary between the roles of the Financial Conduct Authority and the Pensions Regulator, there are no current plans to fundamentally change the arrangements for regulating contract-based pension schemes at this time.
The current regulatory system is of course not sound – indeed to most people it is inexplicable: the Pensions Regulator regulates workplace pension schemes, but it does not regulator the providers of those schemes. It sounds like a classic case of Whitehall siloism, a system you wouldn’t design from scratch but one which is too much of a headache to change.
That conclusion is not entirely fair, because there is at least one very reasonable rationale for the existence of two regulators: the existence of two very different types of workplace pensions. TPR regulates trust-based schemes (which may be defined benefit or defined contribution), while the FCA regulates contract-based schemes. This is because trusts are independent organisations in their own right, whoever ‘provides’ them, whereas contract-based schemes are merely composed of individual pension products provided by an insurance company. The former needs scheme-level oversight, and the latter needs provider-level oversight. Hence two regulators.
Inevitably, it isn’t quite this simple, for two main reasons. Firstly, members of any type of defined contribution scheme have to buy an annuity at retirement, and all annuity products are regulated by the FCA. Secondly, TPR has a responsibility for ensuring that all types of pension product adhere to standards set in laws on automatic enrolment. (And I’m not even going to mention the Prudential Regulatory Authority, the FSA’s other offspring.)
But it is possible to at least appreciate why the idea of a single regulator is not straightforward. Just as important is ensuring that workers are enrolled in the right type of scheme. In our view, the right type of scheme will usually be trust-based, the ones regulated by TPR. In theory they are run by independent trustees whose sole concern is the best interests of scheme members.
So if everyone is in a trust-based scheme, the current regulatory architecture becomes more palatable. It wouldn’t be perfect, but there would be less to regulate, and the FCA could at least focus more on the annuity market rather than pensions saving products.
Sadly this is not current government policy. But today they have moved considerably closer to introducing greater independence and fiduciary oversight into the FCA universe of contract-based pensions.
In rejecting the committee’s call for ’member committees’ within all workplaces with a contract-based scheme, the government says
We will be exploring whether there are alternative options [for representing members’ interests within governance arrangements] for contract-based schemes, to avoid requiring member committees for each employer. This could be at provider level, or some intermediate arrangement, though we would not wish to preclude employers who wish to set up governance committees from doing so.
The possibility of member-centred pension scheme governance ‘at provider level’ is potentially more radical than it initially appears. It means insurance companies, whose sole legal duty is to their shareholders, would need to include some of their customers in corporate governance. This would make contract-based schemes look significantly more like trust-based schemes in some ways, so it’s a welcome step in the right direction.