Department for Work and Pensions. Offering a default option for defined contribution automatic enrolment pension schemes public consultation

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1 Department for Work and Pensions Offering a default option for defined contribution automatic enrolment pension schemes public consultation Response from The Pensions Management Institute

2 - 2 - Consultation from DWP: Offering a default option for defined contribution automatic enrolment pension schemes public consultation Introduction The Pensions Management Institute (PMI) is the professional body for people working in the pensions sector. The PMI s members (currently over 4,200) work as pensions managers, consultants and technical specialists in consultancies and insurance companies. Many are also actuaries, pensions lawyers or company secretaries. Their experience is therefore wide ranging and has contributed to the thinking expressed in this response. Background The Pensions Act 2008 has introduced a new workplace pension regime which will in time require all employers, regardless of size, to provide a pension scheme. All employees who meet basic eligibility criteria and therefore qualify as eligible jobholders will be automatically enrolled into the employer s scheme. Other employees may join the scheme should they wish to do so. Employers will have the choice of enrolling eligible jobholders into the National Employment Savings Trust (NEST) or a Qualifying Scheme of their choosing. The Qualifying Scheme may be a Defined Benefit scheme. However, it is commonly expected that in the significant majority of cases the Qualifying Scheme will be a Defined Contribution (DC) arrangement. DC Qualifying Schemes must all have a default fund. As members will join the Qualifying Scheme without necessarily having given their explicit consent to do so, they will at least initially have contributions invested in the Scheme s Default Fund. The Government is therefore keen to ensure that the Default Fund s design is appropriate for contributions to be made to it under such circumstances.

3 - 3 - The PMI s response Q1. Are the aims of this guidance clear? We are satisfied that the aims are sufficiently clear. Q2. Would it be helpful to include examples illustrating how to create tailored default options to suit different employee profiles? We believe that the concept of a default fund is sufficiently well-established as to make this unnecessary. Employers should in any event be encouraged to seek professional guidance with regard to designing a default fund if required. Where employed, professional consultants will be expected to tailor default fund design to clients requirements without external guidance. For smaller schemes, without the ability to pay for this investment consultancy, the provider should be able to assist, specifically with regard to WPPs. Q3. Is the definition of the default option accessible for readers? We are satisfied that the definition is sufficiently accessible. Q4. Bearing in mind the complex nature of responsibilities, is this description acceptable? The description is acceptable in the case of contract-based schemes. In the case of contract-based schemes, selecting the provider is the responsibility of the employer. The employer should bear principal responsibility for reviewing the continuing suitability of not just the provider, but also all aspects of the scheme provided. However, it should be remembered that in the case of occupational schemes, trustees retain ultimate responsibility for all aspects of a scheme s governance. Although governance functions may be delegated, responsibility cannot. Q5. Should specific examples of risk management strategies be provided? As with Question 2 above, we believe that it is particularly important that employers and trustees seek professional guidance concerning all aspects of scheme design. It is to be expected that professional consultants with relevant skills and qualifications should be capable of identifying suitable risk management strategies without the need for external guidance. It is also important that innovation is not stifled by over-prescriptive guidance. Q6. Have we sufficiently described the role of the risk management strategy in the default option and is it accessible for readers? We are satisfied that the role of the risk management strategy has been described in sufficient detail. We are satisfied that it is sufficiently accessible to readers. However, it would be beneficial for guidance to require that all member charges be explicitly expressed as a Total Expense Ratio (TER).

4 - 4 - Q7. Does this section set out appropriate standards for reviewing the default option? We are satisfied that this section sets out appropriate standards for reviewing the default option. We recognise that the provided list of criteria for assessing the continued suitability of the fund range is not intended to be exhaustive. However, we consider that a periodic review should include an assessment of the pension provider itself, and should consider criteria should as financial strength, the quality of administration and the quality of communications. We believe it would be helpful for these assessment criteria to be explicitly identified in any guidance ultimately provided to employers and trustees. We also suggest that the guidance makes clear, if it is the intention, that the list provided is to indicate when a review in addition to the three year review might be appropriate rather than that such a review should be automatic. We do not consider that a full review should be automatic in the examples provided, particularly as in several cases the criteria are subjective, and as drafted it could also include very minor changes to the charging structure. Q8. Does this section set out appropriate standards for communicating the default option? The initial communications to members should also comply with the existing disclosure requirements arising from the Occupational Pension Schemes (Disclosure of Information) Regulations More than ever before, auto-enrolment will highlight the need for the same disclosure regime apply to all workplace pension schemes, whether they be trust or contract-based. Q9. Is this an accurate reflection of the roles and responsibilities for trustees regarding the default option? As has been noted previously, trustees cannot delegate their responsibilities to third parties. Guidance to trustees should require them explicitly to effect a suitable Service Level Agreement (SLA) with all scheme advisers to ensure that roles are fully understood. Q10. Have we sufficiently described the role of the risk management strategy in the default option and is it accessible to readers? As noted above, charges should be expressed as a Total Expense Ratio. The nature of investment in unitised funds will mean that investment in the business of the sponsoring employer will not in practice be an issue applicable to DC schemes. Q11. Does this section set out appropriate standards for reviewing the default option? As has been noted in our response to Question 7, a review should also consider criteria such as the quality of administration and the quality of communication material. In the case of a bundled pension arrangement, this would in practice mean a formal review of the provider itself rather than just the range of funds that it offers. In the case of unbundled schemes (as might typically be the case for larger occupational arrangements), such a review might require an assessment of the role of a range of service providers. We would also repeat our observation made in the response to Question 7 that some circumstances may warrant a partial rather than full review.

5 - 5 - Q12. Does this section set out appropriate standards for communicating the default option? We have noted above that information concerning the default fund should be incorporated into the existing disclosure requirements as defined in the Occupational Pension Schemes (Disclosure of Information) Regulations We would also repeat the view that the same disclosure requirements should apply to both trust and contract-based workplace schemes. **** **** ****