After opt-outs, automatic enrolment will, in my estimation, create six million new pension savers.
The pensions industry is rightly seeing this as a big opportunity but we also inherit a big responsibility too. If we get this wrong, our customers will never forgive us.
At the heart of getting it right is good governance.
Insurance companies have been making steady progress for years, nudged along by our regulator, the FSA, and its good governance initiatives like TCF. Our product design processes, fund governance and complaints handling have all improved markedly.
And, despite what others may say, insurers have made positive changes off their own bat too, such as the new OMO Code of Practice. Insurers’ pension customers are already much more likely to shop around for their pension income than members of trust-based schemes, and this will hopefully improve things further.
Trust-based schemes, on the other hand, are a mixed bag when it comes to governance. Some of the biggest ones like Nest do it very well (although they do spend a lot of taxpayer’s money doing it).
But others, including big schemes, with more than 1,000 members are not exactly shooting the lights out. The Pensions Regulator recently measured trust-based schemes against a benchmark of 21 features that they thought should be present in well-governed schemes. Things like knowledgeable trustees, good administration standards and reviewing the default fund.
Only 8 per cent of large schemes could demonstrate the presence of all 21 features, and only 1 per cent of small schemes. Put another way, 92 out of 100 large trust-based schemes have room for improvement, most of them lots of room for improvement.
And these are the ones that are trying to get it right. The barriers to entry are so low that the trust-based market is now home to pension refunders, taking advantage of the two-year refund rule, and pension liberators.
The Pensions Regulator knows there is a problem. It has already said that it does not want people automatically enrolled into small DC schemes. It also published a new code of practice with a ‘comply or explain’ regime.
Is comply or explain good enough?
That’s not how the FSA and its successors work. The FSA has the power to take regulatory action against failure and frequently exercises this power. The FCA will have even greater power; to immediately stop any practice potentially leading to customer detriment whilst it investigates.
The Pensions Regulator does not have the same resources to get tough with the tens of thousands of under-performing trust-based schemes. That is why they are allowed to self-certify.
The answer to this conundrum is simple, in my view; raise the entry barrier.
This could be done by imposing a good regulation levy on trust-based schemes, giving the regulator the funds to do a proper job. It would also see all those small schemes unable to afford the levy move their members to bigger schemes capable of doing a good job. And it would also allow the regulator to develop a proper registration system to keep refunders and liberators out.
The FSA is raising the entry barriers to the Sipp market at the moment, introducing new capital adequacy and compulsory new business illustrations. And rightly so. The Pensions Regulator should observe its actions with interest.
John Lawson is corporate benefits head of policy at Aviva