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Pensions automatic enrolment: setting the standard for DC schemes
Standards that defined contribution (DC) pension schemes should meet to increase the chance of individuals receiving good outcomes from their retirement savings are published recently by The Pensions Regulator.
Under the Government’s pension reforms between 5 and 8 million people are expected to be saving more or saving for the first time, the vast majority into DC schemes. Automatic enrolment raises the bar for the industry in areas such as the scheme governance and administration. Providers will need to deal with new processes, and significant numbers of employers and employees that lack previous engagement with pensions.
Chief executive of The Pensions Regulator Bill Galvin said:
“We expect all DC schemes to demonstrate how they will comply with our principles for good DC schemes and this will give employers reassurance about their choice of scheme.
“Members bear risks where DC schemes perform poorly. Many members will not have any experience of DC pension saving, so it's vital that schemes are run by capable people who act in members’ interests - from enrolment to retirement.
“Where we find schemes fall short of the standards we have set out, we will expect them to improve. Some smaller schemes may find this challenging and decide that the interests of their members would be better served in another type of arrangement.”
The regulator is working with the pensions sector to encourage the design and delivery of pension products run in accordance with its principles and quality features for good DC schemes. Our research indicates that larger DC schemes, benefiting from economies of scale, have the resources, governance, time and expertise to be able to comply. The regulator’s communications to employers will steer them towards choosing schemes for their workforce that meet these standards.
Key elements of the package of measures published for consultation today include:
A set of 31 DC quality features covering key areas such as contributions, investments, governance standards, administration, value for money, converting a pension pot into a retirement income and member communications.
A ‘comply or explain’ regime – occupational DC trust-based pension schemes will be expected to adopt a disclosure framework to demonstrate how they comply with the DC quality features, or to be able to explain any inconsistencies. Disclosure will help to give employers confidence that schemes they choose for their workers meet certain standards and will require trustees to consider what processes are in place that ensure the presence of the each feature. Schemes might choose to disclose this information via their annual report, for example.
'Master trusts’ will be expected to obtain independent assurance which can help demonstrate that they comply with the DC quality features. Master trusts have potential to offer benefits such as low charges and good governance. However, because of the significant numbers of workers expected to be automatically enrolled into this segment, the regulator believes that an additional level of assurance is necessary to address risks such as low barriers of entry to the market and the potential for conflicts of interest if the trustees have a close association with the provider.
A code of practice for occupational DC trust-based pension schemes that provides practical guidance on the requirements of pensions legislation and sets out standards of conduct and practice expected of those responsible for running schemes. Standards set out in the code will be a key reference as to whether enforcement action is necessary.
The DC code should be read in conjunction with regulatory guidance setting out good practice standards in areas such as value for money, transparency of costs and charges and member communications.
Where trustees fall short of the standards expected the regulator can take action to put things right. This includes issuing notices directing compliance with the law, fines and removing trustees and replacing them with new ones.
The Pensions Regulator and the Financial Services Authority (FSA) are working together to ensure similar levels of protection in both occupational DC trust-based pension schemes and work-based personal pensions (also known as contract-based schemes), where regulatory responsibility is shared. The regulator’s initial analysis, published today, shows good alignment between the DC quality features and FSA requirements for work-based personal pensions.
Later in 2013, we expect to produce a final version of our analysis on how member benefits are protected in work-based personal pensions. We will also agree joint working protocols with the FSA, and its successor bodies, to determine how breaches of the law should be dealt with between regulators to ensure we have a coherent and effective regime.
Martin Wheatley, FSA managing director and chief executive designate of the Financial Conduct Authority (FCA), said:
“We welcome this publication from The Pensions Regulator, and are pleased that the initial analysis confirms that there is good alignment between the regulator's quality features and our requirements. We enjoy a good working relationship with the regulator and we will continue to work with them to develop this analysis further.”
2. The standards are being issued for consultation and the regulator looks forward to receiving feedback from across the pensions industry and representatives of members, employees and employers. The deadline for consultation responses is 28 March.
3. Where we detect breaches of pensions law, we will take action if it is reasonable to do so. This includes directing compliance with the law in the manner set out in the Code. Non-compliance with such a direction could result in further action. There are a number of enforcement options available to the regulator:
publishing reports about cases where we have considered using our powers
informal action such as a warning letter
formal requests for information
appointment of skilled persons to the scheme
issuing statutory notices such as ‘improvement notices’ or ‘third party’ notices – directing schemes to rectify breaches of pensions law, or face further sanctions
civil penalties of up to £5,000 for individuals and up to £50,000 for companies
appointing and prohibiting trustees
applying to a court to restrain misuse or misappropriation of assets.
4. The regulator last week published research indicating that larger occupational DC trust-based pension schemes are more likely to display the quality DC features necessary for good member outcomes than smaller schemes.
5. The Pensions Regulator is the regulator of work-based pension schemes in the UK. We have objectives to: protect members’ benefits; reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; and to maximise employer compliance with automatic enrolment duties.
Ben Lloyd 01273 627208
Katherine Long 01273 811859
Katy Geary 01273 627277
Rebecca Sandles 01273 811870
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