Over the last 20 months we have seen a different force within pensions, thanks to The Pensions Regulator. Unlike its predecessor, the Occupational Pensions Regulatory Authority, which worked with a somewhat tick-box mentality, The Pensions Regulator is a risk-based being. This means it will step in and investigate schemes but only where it sees things are not going quite right and there is a big chance that a lot of people will lose out.
So far, The Pensions Regulator has concentrated on defined-benefit schemes and its influence has been widely felt. But its scope goes much wider and includes all work-based pension arrangements. It has now turned its attention to defined-contribution plans, including money-purchase occupational schemes, group personal pensions and group stakeholder.
Last month, it issued a consultation paper setting out the risks it believes are faced by members of defined-contribution plans. It put forward proposals to address these risks and also set out how it will regulate these arrangements but stopped short of proposing new legislation.
The paper identifies five key risks for members covering the full lifespan of defined-contribution arrangements – poor administration practices, poor investment practices, unduly high charges, poor decisions on retirement choices and lack of member understanding.
To combat these risks, The Pensions Regulator’s proposals centre on three key strands. First, education and guidance, combining the work it is already carrying out developing trustee knowledge and understanding with new initiatives. Second, working with partners such as the Government, other regulatory bodies including the FSA and the industry to identify future initiatives and make sure all are taking the same approach. And third, intervention by naming and shaming where it identifies persistent or significant failures.
No one could argue against the general thrust of The Pension Regulator’s initiative. The shift from defined benefit to defined contribution over the past 20 years has transferred most risk to the individual and they need to understand these risks to help them make informed decisions.
This is one of the big challenges facing UK pensions today and, indeed, has big implications for the current discussion on the proposed introduction of personal accounts in 2012.
But it is when you start to scratch the surface of the paper that doubt sets in. The Pensions Regulator has set out to tackle the bits of defined-contribution plans it thinks it has ownership over. For example, it is going to publish more e-module training for trustees and is starting to mention service level agreements and best practice but a lot of the risks and areas for improvement it identifies are also governed by the FSA.
Member communication is mentioned as a risk and the need for clear, simple, timely information is emphasised to help prevent individuals making ill-informed decisions. There is no doubt that some providers, schemes and third-party administrators should review and improve their communication but a lot of what they can say to members, the style in which they say it and when they can say it is dictated by disclosure regulations issued by the FSA or Department for Work and Pensions.
Everyone in the industry needs to take a collective step back and identify the real risks that members face – the risk of joining when it is not in their best financial interests to do so, the risk of not joining the pension plan and the loss of employer contribution and life cover that leads to, the risk of not paying the right level of contribution and not targeting the expected level of retirement income, the risk of not understanding the nature of investment risk and tackling the fear of making investment decisions, the risk of getting the retirement timing right and, finally, the risk of buying the right decumulation option for themselves and their family.
The Pensions Regulator cannot solve all these problems and there is a danger that some areas will overlap with the FSA’s remit while others will fall between the two regulators and be lost.
It is important that the industry gives a strong response to the consultation, helping The Pensions Regulator and others to appreciate and deal with the broad issues as well as the particular aspects set out in the consultation paper. We need to work together to tackle them all and help people save for the retirement income they want and need.
Rachel Vahey is head of pensions development at Aegon Scottish Equitable