Pensions regulation doesn’t stand up to scrutiny
The Work and Pensions select committee has today added its voice to the head of steam building up against ‘defined contribution’ (DC) workplace pensions – the type of pension that most people will be automatically enrolled into under new obligations on employers.
Debate is now beginning to focus on the issue of how DC pensions are regulated, or more precisely, who regulates them. There is currently a discrepancy between the Pensions Regulator’s (TPR) oversight of the auto-enrolment process and workplace pension scheme design, and the Financial Services Authority’s (FSA) oversight of the insurance companies that provide DC pensions.
And this problem has just been exacerbated by the split of the FSA into the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The committee was scathing about the evidence given by the FSA to their inquiry into Improving Governance and Best Practice in Workplace Pensions. This is from the committee’s report:
The FSA did not indicate how much of its resources it had allocated to regulating pension schemes to take account of the risks associated with auto-enrolling low-income individuals into pension schemes, some of which may have high charges… it was not apparent from [FCA Chief Executive] Martin Wheatley’s evidence that any change in approach could be expected when the FCA took over these responsibilities from the FSA in April 2013.
The committee has therefore urged the FCA, if it remains in charge, to ‘adopt a pension-specific regulatory strategy and to set up a well-resourced team dedicated solely to proactively regulating contract-based pension schemes’. The committee’s preferred approach, however, is a single regulatory body with authority over all aspects of defined contribution pensions. Presumably this body would combine TPR’s expertise in good scheme design and financial regulators’ powers to intervene in the market when it spots bad practice.
The call for a single regulator was first made (a little more tentatively) last year by the National Audit Office (NAO). The NAO’s inquiry into DC regulation concluded:
Because there is insufficient clarity regarding regulatory objectives and risk assessment, it is unclear whether TPR has an appropriate level and range of powers. TPR has statutory powers to promote good practice and to take more formal actions, such as fining employers who do not maintain contributions. These powers provide a range of options for regulating trust-based schemes, which include the power to remove and replace trustees. But in contract‑based schemes, where responsibilities are shared with the FSA, TPR has fewer options to intervene directly compared to trust-based schemes. It has no powers regarding the providers of contract-based schemes, but it has the statutory objective to protect members’ benefits in these schemes.
In fairness to the Work and Pensions committee, it was their own 2012 report into auto-enrolment that did so much to ignite interest in DC provision. This earlier report indentified several risks to achieving value for money in workplace pensions, yet the committee appears to have concluded that the government, regulators and the pensions industry have not heeded their warning quickly enough.
The House of Lords committee on Public Service and Demographic Change added their voice to the chorus earlier this year. In questioning whether the UK pensions system was ready for the challenge of an ageing society, the peers found ‘serious defects’ in DC pensions in that they place investment risks entirely with individuals.
The Office of Fair Trading (OFT) may soon be about to join in too, when they publish their ‘market study’ into DC pensions later this year. Obviously we cannot know for certain what the OFT will say, but there is a clue about what they might find in the inquiry’s title. Pensions provision cannot possibly operate as a marketplace, because of the immense and insurmountable information asymmetries between consumers and providers – yet the government too often makes policy on the basis that a functioning market does exist.
‘Pot follows member’ is a classic example of this mistake. The government has this week decided that, when an employee moves jobs, they should take their pension pot with them automatically, and invest it into their new employers’ scheme. There is a huge risk of consumer detriment involved as individual scheme members cannot possibly be expected to judge whether their new scheme is ultimately better or worse than their old scheme. Pot follows members therefore hands a constant stream of new investment to providers without making them earn it.
The Work and Pensions committee’s report flags up significant concerns about the government’s approach to pension transfers. There are several other areas where the committee shares the views put forward by the TUC, including the need to ban consultancy charges, and the need to consider a cap on pension charges in general. The committee is also rightly calling for government and regulators to do much more to support the establishment of governance committees in contract-based DC provision, to give workers a voice in how their pension scheme is managed in the absence of trustee oversight.