Pensions regulator consultation on regulating work-based defined contribution pension schemes. Response from Buck Consultants

Transcription

1 Pensions regulator consultation on regulating work-based defined contribution pension schemes Response from Buck Consultants March 2013

2 2014 Xerox Corporation and Buck Consultants, LLC. All rights reserved. Xerox and Xerox and Design are trademarks of Xerox Corporation in the United States and/or other countries. Buck Consultants is a registered trademark of Buck Consultants, LLC in the United States and/or other countries. BRP2825. Other company trademarks are also acknowledged. Document Version: 1.0 (July 2014).

3 Introduction We are pleased to be able to respond to this very important consultation. Workplace pension provision is currently at a low level, a situation which will only be partially addressed by the rollout of automatic enrolment, with its relatively low minimum contribution and benefit levels. Even after the introduction of the new single-tier state basic pension in 2016, there will still be a need for widespread workplace provision, if the UK is not to see a generation of pensioners faced with Hobson s Choice of living in extreme poverty or working until they drop. It is possible that the government s initiative to develop new workplace pension scheme designs will produce a wave of new schemes in the defined ambition (DA) space between defined benefit (DB) and defined contribution (DC). However, for the immediate future, the predominant design basis will be DC, and even if DA gains widespread traction, it is likely to produce designs that have at least some DC element. Because of this prominence, it is very important that DC schemes provide safe and effective outcomes for their members: But those outcomes are often more difficult to achieve with DC because of the distribution of responsibilities between the sponsoring employer, the trustees and the members themselves, which can result in a lack of cohesion, increasing the risk of a poor outcome. This points to the need for an effective regulatory system, to ensure that the governance processes in such schemes are themselves effective. However, there is also a need to balance the weight of the regulatory system against the benefit it confers; part of the decline in workplace pension provision is undoubtedly due to the overweight regulatory system that has been applied to DB provision (a fact which we believe has been acknowledged by the DWP). Part of that weight is manifested in a level of prescription that effectively defines the design of DB schemes, stifling any possible initiatives in that area. It is therefore important that the situation with DB is not replicated with DC. We were hopeful that the Pensions Regulator s new purpose-designed regulatory regime for DC would recognise that important fact, and reflect it. There are many useful aspects to the proposed new regime, and it is helpful to understand the Regulator s view of the practical steps that it regards as representing good practice. Unfortunately however the process of incorporating those into the Code results in the proposed level of prescription and intrusion into the workings of DC schemes now being too high. The (very lengthy, and repetitive) Code and Guidance documents between them effectively force on trustees a regime for the day-to-day working of schemes, which is not only prescriptive, but also requires a heavy and bureaucratic workload. A particular example of this is the detailed requirements for the contents of a trustee meeting. Furthermore, in an apparent attempt to exert control over the workings of schemes through the control of trustees, the regime tries to impose requirements upon trustees to control issues that are not currently within the trustees area of influence, let alone control. One of the outcomes of this proposed regime is that it is expected that the workload on smaller schemes in particular may become too much for some of them to cope with; however, instead of recognising that as an indication that the provisions are too Buck Consultants: DC work-based pensions regulation 2

4 detailed and prescriptive, the documents appear to use it to support a campaign to eradicate smaller schemes. Whilst we support a move to raise the standards of small schemes where they are poor, we do not agree that all small schemes are badly run, or that they necessarily offer bad terms and outcomes to their members. Where a scheme for the employees of a small employer satisfies the needs of both parties, we do not think it is the proper role of the government or a regulator effectively to deny the option for such an employer to run their own workplace pension scheme. Finally, we are concerned that there are likely to be differences between the regulatory requirements for trust-based schemes and contract-based, due to their being regulated by different regulators. This is not only illogical, but is also likely to impose a higher level of regulation on trust-based schemes, despite their having a group of people running them (the trustees) who are also subject to strong legal controls over their behaviour whereas contract-based schemes do not necessarily have such a governing group, and where such a group is appointed they are not subject to the same legal controls. Such a situation may lead to a return to the kind of regulatory arbitrage that determined the types of schemes that were most popular following the introduction of the Pensions Act 1995 regime. 3 Buck Consultants: DC work-based pensions regulation

5 Responses to the consultation questions Our responses to a number of the specific consultation questions are either directly or indirectly provided in the text above. Where we have additional comments, we provide them under the relevant question below. DC code of practice 3. Do you agree that voluntary disclosure of consistency with the principles and features is a suitable approach for trustees to demonstrate the presence of DC quality features contained in the DC code and DC regulatory guidance? Yes. We believe that voluntary disclosure is likely overall to be an appropriate and effective methodology, which balances the interests of the members with those of the trustees and the Regulator. 5. Should requirements outlined for disclosure and independent assurance outlined above be incorporated in pensions legislation? No. Committing detailed regulatory approaches to legislation stifles any scope for flexibility, leading to rigid and prescriptive regulation. Where this occurred with DB regulation, the result has been that the regulatory system has in effect dictated much of scheme design and practice, stifling initiative. This is part of the reason for the polarisation of workplace scheme designs that we see today, and which the DWP is striving to move away from, in its DA initiative. 7. Does the level of guidance included in the DC code in relation to internal controls and trustee knowledge and understanding provide sufficient detail to enable trustees to comply with pension legislation and undertake their role effectively? The guidance contained in the code makes the document too detailed and repetitive, especially since a significant part of it is guidance and not legal requirements, so its Buck Consultants: DC work-based pensions regulation 4

6 inclusion in the code risks confusing its status. Also, it is difficult to discern what the new document adds to the details already contained in codes 7 and 9 in these areas. 8. Are there any other legal requirements which you think should be brought within the scope of the code? No. At the moment pensions law is undergoing significant amendment and it is difficult to identify any specific omissions. 10. Do you agree that the regulator should issue a code of practice in order to clarify the standards it expects in occupational DC trust-based pension schemes? If not, what other vehicle could we use to provide further education and enablement tools to trustees, and why? It is appropriate for the regulator to issue a code of practice, but as previously mentioned, there should be clarity over the points that are legal requirements and those that are the regulator s view on how those legal requirements may be implemented in practice. The latter are useful to hear, but they should be confined to guidance notes, and reflected (again, as guidance) in the trustee toolkit. 11. Do you agree that we have targeted the DC code at the right schemes? The code seems to cover all types of DC schemes, but in so doing it largely fails to distinguish different types of DC benefits within other types of schemes, such as hybrid designs and additional voluntary contributions within DB schemes. This seems a potentially wasted opportunity, especially when viewed in the light of the growing focus on DA options. If the development of DA leads to more design variety and a growth in the number of such schemes, it may be eventually perceived that a further code is needed to cover DA. As we understand the intention, DA is intended to break down the traditional barriers between the two polar extremes of DB and DC, so separate codes for DA, DB and DC will only lead to repetition, overlap and general confusion in the regulation of workplace pensions. 14. Certain activities or events may call into question the ability of a DC scheme to deliver a good member outcome. Should we develop a DC notifiable events regime that could require and enable certain events to be reported to us, for example a change in administrator as a result of poor quality service? No. It would be difficult to compile an appropriate list of events, and in practice there is a risk that the outcome would simply be more bureaucracy (and costs) for the scheme, with no additional protection for the members, since by the time the event become reportable, the trustees will already have identified the problem and taken action to resolve it. 5 Buck Consultants: DC work-based pensions regulation

7 15. Does the DC code include sufficient practical guidance on the design and governance of default strategies? Yes although we note that it is presented in the context of a default fund being a legal requirement for all DC schemes, not just for those which are being used for automatic enrolment. 16. Do you agree that the practical guidance adequately addresses the risks of the different types of conflicts of interest which may occur within different segments of the DC market? Yes. In fact, this is an area where there is rather too much detail; we consider that the guidance on conflicts of interest issued by the regulator in 2008 is sufficient, and supplementing it with the further detailed guidance in this draft code merely adds to the weight of documents that trustees are required to read and digest, with little additional gain either for them or for the members that they are serving. 17. Does the DC code include sufficient practical guidance on the standards of administration that we expect? Yes; however, once again there is insufficient distinction drawn in the code between legal requirements and the regulator s guidance. Of greater concern though, is that the regulator s requirements on record keeping are included in the draft code, despite their not being legislative requirements. We strongly suggest that they are removed, to avoid any misunderstandings about their status. Buck Consultants: DC work-based pensions regulation 6

8 DC guidance 18. We have set out practical guidance for trustees on assessing the value for money of their scheme. Do you have any comments on this guidance? In most cases it is the employers who will establish the workplace trust scheme, and it will be their remit, not that of the trustees, to review it from time to time, including its value for money. Whilst value for money and related good outcomes for members should be of concern to trustees, in reality there is little that they can directly do about these issues, other than flag them up to the employer and the members. We suggest therefore that this section of the draft code be redrafted to recognise the realities of the respective roles of the parties, including that of the regulator itself. 20. We have set out practical guidance for trustees on helping members to optimise their retirement outcomes. Do you agree with the approach that we have suggested? The guidance once again appears to want to impose on trustees matters that are outside their remit. Trustees duties are to run the scheme to which they are appointed; whilst it is reasonable to expect them in them in the course of discharging their duties to acquire knowledge and experience of the way in which the scheme operates, and to be able to identify possible improvements, it would be inappropriate for the regulator s formal guidance to attempt to impose duties upon them that are outside of their legal requirements. 22. Do you agree that the DC regulatory approach document, DC code and DC regulatory guidance do not place additional regulatory burden on trustees? No, we disagree. As we have highlighted above, the documents attempt to attribute new duties to the trustees, which in some cases they do not currently discharge; consequently, by requiring them to do so now, the regulatory burden upon them is increased. 7 Buck Consultants: DC work-based pensions regulation

9 About Buck Consultants at Xerox Within Xerox, Buck is the consulting strength of the Human Resource Services (HRS) division. Buck offers advisory, technology, and administration solutions to help you effectively manage your programmes while engaging your employees in their health, wealth, and career. By integrating our HR consulting know-how with HRS core services, we can offer additional innovative and customised solutions to help you overcome your HR challenges. Together, we can ensure you have the right people in the right positions at the right time to save money and achieve your business goals. Learn more at Since the invention of Xerography more than 75 years ago, the people of Xerox have helped businesses simplify the way work gets done. Today, we are the global leader in business process and document management, helping organisations of any size be more efficient so they can focus on their real business. Headquartered in Norwalk, Connecticut, we have more than 140,000 Xerox employees and do business in more than 180 countries, providing business services, printing equipment and software for commercial and government organizations. Learn more at For further information, please contact: Buck Consultants: DC work-based pensions regulation 8