Department for Work and Pensions Consultation on Draft Guidance The use of Default Options in Workplace Personal Pensions and the use of Group Self Invested Personal Pensions for Automatic Enrolment Response from The Pensions Management Institute 1
PMI s response to DWP consultation: The use of Default Options in Workplace Personal Pensions and the use of Group Self Invested Personal Pensions for Automatic Enrolment 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. The PMI s Response The range of reforms introduced by the Pensions Act 2008 (PA 2008) will require almost all employers to address the subject of workplace pension. Many will have to do so for the first time. Any workplace pension arrangement used for autoenrolment must be demonstrably adequate for the role, and it is necessary that appropriate safeguards be put in place to ensure that members interests are properly acknowledged. It is to be expected that many employers will choose to participate in the new Personal Accounts scheme. Many, however, will choose to auto-enrol employees into an alternative workplace pension scheme. In recent years, there has been a significant trend away from occupational schemes in favour of contract-based arrangements. If such arrangements are to be used for the purposes of autoenrolment, it is right that proper consideration to scheme design is given to ensure that members investments are adequately protected. Whilst there are existing statutory provisions concerning the design of Stakeholder pension schemes, no such requirements apply to other types of contract-based scheme. We acknowledge that the forthcoming pension regime means that it has now become appropriate for some formal consideration to take place. The DWP s Consultation Document addresses two issues. The first, dealing with default options for workplace personal pensions, posed a number of questions in a format which permitted us to survey our membership and so benefit from the views working in different areas of pension provision (as described above). We were delighted with the level of response to our survey, with 363 responses received over a period of just ten days. Some of our members had strongly-held views concerning the subject in question, and these are reflected in our formal response set out below. 2
Part Two Default options in workplace personal pensions used for automatic enrolment Q1 Does the use of operator provide enough clarity on who falls under the remit of this guidance? Our members responded as follows: Yes 31% No 69% Many respondents suggested that the introduction of new technical terminology was somewhat unhelpful. Some suggested that there was a need for clarification of the roles of all the principal participants, such as the employer and the adviser or consultant. Paragraph 12 states that the operator would have the relevant FSA permissions and so is presumably intended to exclude the employer. However we believe that many employees would regard the employer as the person operating the scheme and who would therefore be the operator. A clear definition is essential to avoid confusion, particularly by members. We see no reason why the existing term pension provider could not be retained. Q2 - Should the DWP issue separate guidance on the design of default options in occupational schemes as well? Our members responded as follows: Yes 69% No 31% We have the following additional comments on the design of default funds. We agree with the process of designing default funds. We believe any guidance published would be welcomed by the trustees of employer sponsored defined contribution schemes, particularly small schemes. However, adequate protection for trustees and employers against challenge from members over the choice of default fund, should it perform below a member s expectations, needs to be in place. We feel that employers should be required to take investment advice from an appropriately qualified person in the same way that trustees are required to take investment advice when designing their default fund. 3
Q3 Would it be helpful to set out in guidance how many options we feel should be offered to the employer? If so, we would welcome views on what is a manageable number of options. We do not consider it necessary for there to be guidance on the number of options to be offered. Currently, schemes almost always use a single default option. This is either selected from an existing option designed by the pension provider or constructed to meet the specific requirements of the employer. The second alternative involves extensive dialogue between the employer and his or her adviser. In general terms, we believe that employers who establish workplace schemes for the purposes of auto-enrolment will fall into one of two camps. In many cases, the employer will simply want no involvement in the selection of a default fund. Typically, but not always, this will be the smaller employer with no financial adviser, or with limited access to financial advice on an ongoing basis. In these cases, the pension provider will have a single standard default fund, and the governance obligations for this should lie with the provider. In other cases, the employer will be keen to have a default fund tailor made for the characteristics of the scheme s membership. In choosing this default, it is essential that the employer takes financial advice, both at the outset and on an ongoing basis in monitoring this choice. In these cases, the governance obligations should fall on the employer, who will discharge them with the help of a suitably qualified adviser. We consider it important that guidance should acknowledge these two separate scenarios and address each specifically. Both will exist at the time that the reforms are implemented and for the foreseeable future thereafter. Q4 Would it be useful to define common industry benchmarks more closely? Our members responded as follows: Yes 80% No 20% We believe that it would be beneficial to offer members a means of assessing a fund s performance against that of its peers. It is however imperative that information made available to members Is in a format that the layman can reasonably be expected to understand; and Provides information that is of genuine use to members. 4
We feel that a traditional approach, such as comparing returns against an index, simply does not provide adequate information to members. Any formal definition of common industry benchmarks should be meaningful and consistent. Q5- Are there any other cases which should trigger a review? and Q6- What else should the review of the default option look at? Members suggested that the following events should appropriately trigger a formal review: Reviews should be conducted at regular intervals regardless 86% of performance Changes to charging structure 74% Changes to insurance company strength rating 55% Administration errors 42% Poor communications 31% Marketplace innovations 45% Members also suggested that changes in membership structure should also trigger a review. Q7 -We are considering recommending that operators should make information on the review of their default option available on their website. How feasible is this? 56% of respondents considered this to be a feasible suggestion, although 44% did not. Members were anxious that use of a website should not be allowed to compromise more traditional communication channels. Others noted that the requirements of schemes would vary, and that the results of a review of a default fund might be of more significance to one scheme than it would to another. Members gave a somewhat mixed response to the proposals as a whole. Some respondents were concerned that more focus should be placed on charging structures. Others commented that members should be encouraged to make their own fund choices and that it was unwise to become overly reliant on the structure of a default fund. There was also concern at the extent to which workplace pension schemes should be subject of formal regulation. 5
Part Three - Automatic enrolment into Self Invested Personal Pensions (SIPPs) Q1 Are these definitions helpful and are there any alternative definitions which you could suggest? The definitions are helpful as they will ensure consistency of understanding. Q2 Would it be helpful to provide separate sections on the use of insured and non-insured group SIPPs given their different structures? Many employers particularly those who will be addressing the subject of workplace pension provision for the first time will not be familiar with the different ways that insured and non-insured SIPPS are constituted and the subtle ways that these differences can affect investment options. The key difference here is the requirement for an insured SIPP s assets to comply with the FSA s permitted linking rules. With this in mind, we believe it would be appropriate for separate sections to be issued. Q3 Do you view non-insured group SIPPs as a suitable product for autoenrolment, given their non-tiered structure? We believe that SIPPs are generally used by individuals who are financially aware and who wish to be able to direct how their funds are invested. They tend to be higher earners and therefore not the target market for personal accounts. We therefore do not believe that non-insured SIPPS should be used for auto-enrolment. *** *** *** 6