The master-plan: how will the Pensions Regulator respond to market innovation?
Generally speaking, scale in defined contribution (DC) workplace pensions provision (the likely destination of most people auto-enrolled into a pension in the next few years) is a good thing. Most of all, scale can bring cost efficiencies, enabling lower charges and/or an enhanced service for individual scheme members. DWP is also right to suggest in its ‘reinvigorating workplace pensions’ strategy that scale might be a pre-requisite of introducing risk-sharing into DC provision.
The arrival of large-scale, multi-employer DC providers in the pensions marketplace (the so-called ‘master trusts’) in the wake of automatic enrolment is one of the things that has prompted the Pensions Regulator to revamp its code of practice and regulatory guidance for trustees of DC pension schemes. It remains to be seen, however, whether the Regulator has done enough to unlock the benefits of scale while addressing some of the concerns around the governance of master trusts.
The governance of any pension scheme is an important issue – but especially so for master trusts, which operate at a greater distance from actual workplaces, and do not have the same requirements for member representation as regular trust-based schemes. The independence of some trustee boards from the service provider can also be questioned. Trustee boards are not established by a sponsoring employer, but rather by the provider, often an insurance company. These companies – or related enterprises – generally provide a suite of services to the scheme, including asset management.
The Pensions Regulator has correctly identified that such arrangements pose a risk to schemes being governed solely in members’ interests. If trustee boards were to determine that services provided by the original founding company were no longer performing well, or do not represent value-for-money, the members’ interests must always come first. But how realistic is it that a trustee board established by a certain provider is going to switch from that provider? The commercial interest of the provider is evident not simply in the services that trustees choose to procure, but also the entire architecture of the scheme. Even where trustee boards are genuinely independent, do they have the capacity to exercise their independence in practice?
One way around this dilemma would be for the Pensions Regulator to establish a licensing system for master trusts. The Regulator would stipulate standards of governance for master trusts, chiefly the ability for trustees to make decisions free from any commercial interest of founding companies, that must be met before any (new) business from employers can be accepted.
Mater trusts clearly require a prescriptive regulatory approach when it comes to governance arrangements. But one of the complaints that master trusts make about this prospect is that the high cost of compliance would drive employers to choose group personal pension schemes (GPPs) – where there is no formal, independent, scheme-level governance whatsoever. A licensing system might be able to tick both boxes: very clear governance standards, alongside a light-touch regulatory regime in terms of day-to-day operations for providers demonstrating they have met these standards.
Incidentally, the regulation of group personal pension schemes falls outside the remit of the Pensions Regulator, for the most part. There is therefore a major question for government about whether the absence of a common regulatory framework for all types of DC provision is in the best interests of the pensions system as a whole. GPPs do of course operate under the rubric of the Financial Services Authority – not to mention contract law. Part of the problem with master trusts is that, in some cases, they enable providers to offer a product that looks very much like a GPP and yet escape the regulatory clutches of financial regulation – although the effectiveness of this regime in practice is questionable.
The Regulator’s proposals are currently open for consultation. The issue of governance is also the subject of the TUC’s next seminar on workplace pensions, The Governance Gap: Improving Accountability in DC Pensions, which features the shadow pensions minister Gregg McClymont MP.