A matter of trust-based DC pensions schemes
Prompted by the need to ensure the success of automatic enrolment, and in response to what it regards as being ‘mixed standards’ across schemes, in July The Pensions Regulator (TPR) published its revised draft Code of Practice for trust-based defined contribution (DC) pension schemes.
The purpose of the revised draft Code of Practice is to help trustees of these schemes improve standards, and ensure good member outcomes. The Code is subject to Parliamentary approval and is expected to come into force in November this year.
TPR had published an initial draft Code of Practice for consultation earlier this year which was widely perceived to be too long and inaccessible, and the aim of the revised draft Code is to make it easier for trustees to use as a reference document that provides practical guidance on meeting the legislative requirements for running a trust-based DC scheme.
The revised Code is split into five core sections:
1. Know your scheme
2. Risk management
4. Governance of conflicts of interest and advisers/service providers; and
Each section contains DC quality features that represent the standards TPR expects trustees to attain which will demonstrate that they are incorporating good practice into the running of their scheme, and so complying with pensions’ legislation. To further assist trustees in their duties, in November TPR plans to publish further regulatory guidance on matters not addressed in the Code.
In doing all this, TPR wants to increase the likelihood of employers choosing a good scheme for their workers, and that adherence by scheme trustees to the principles and quality features set out in the revised draft Code will increase the chances of this happening. Initial feedback to the Code from commentators has been positive, and the expectation is that it should hopefully improve public confidence in pension provision and help ensure the success of automatic enrolment.
OFT proposes ban on ‘built in’ adviser commissions for auto-enrolment
The banning of pension schemes with “built in” adviser commissions or active member discounts being used for auto-enrolment has been urged by the Office of Fair Trading (OFT).
Released on 19 September, the OFT’s study into the workplace defined contribution pension market, sets out concerns over the £30 billion in savings held in old, high-charging schemes and the £10 billion in small trust-based schemes. The OFT says it could have referred the industry to the Competition Commission, but elected not to after the Government, The Pensions Regulator (TPR) and the industry agreed on a number of measures to tackle its problems.
To address the OFT’s concerns about old and high-charging contract and bundled-trust schemes, the Association of British Insurers (ABI) has agreed to an immediate audit of schemes with an annual management charge of more than 1%. The aim of the audit, which will be overseen by an independent board, is to ensure savers are getting value for money.
The ABI’s members have also agreed to establish independent governance committees to rectify a lack of independent scrutiny in contract-based pension schemes. These committees will be set up in mid-2014 with the aim of overseeing value for money in workplace schemes. The
OFT says TPR will take “rapid action” to assess which smaller trust-based schemes are not giving value for money. The Department for Work and Pensions (DWP) will also consider whether TPR needs new powers to tackle the problem. It has also asked the DWP to consult on preventing schemes being used for auto-enrolment that contain in-built adviser commissions or that penalise members with higher charges when they stop contributing into their pensions.
The Government could target pre-RDR commission after pensions minister Steve Webb confirmed the ban on consultancy charging may be applied retrospectively. The OFT wants the DWP to consult on improving the transparency and comparability of information about the charges, including whether providers could disclose a single annual management charge and investment transaction costs. The report did not advise a cap on charges, because that could affect members with valuable guarantees and result in unintended consequences.
The report says: “Charge caps can create a risk of unintended consequences. Set too high, a cap can become a target for providers. Set too low, a cap can create incentives for providers to lower quality and/or impose less visible charges elsewhere.
“While we would not rule out a charge cap, it should be considered in full knowledge of the different charges and benefits that apply in the market and of the risks that a cap might entail.