The defined contribution (DC) pensions landscape is notoriously dysfunctional. While employees are the ultimate customers, it is their employer that makes the decision of which to purchase on their behalf.
So, for employees to get a good deal it relies on their employer’s capability and engagement – and like everything in pensions, relying on engagement to drive good outcomes is a recipe for trouble. Most employers, understandably, have little or no knowledge of what can be a very complex product, and will find it extremely difficult to sort the wheat from the chaff.
These decisions can have a profound impact on their employees’ futures from a position of ignorance, or even apathy. Thankfully Nest and the other master trusts have mitigated this problem, as they provide all-encompassing go-to schemes for any employer who’s unsure what to do.
We are concerned that all too often the pensions landscape fails to deliver a good retirement outcome for its members – we believe there should be a ‘north star’ objective across the system: ‘the purpose of pensions is ultimately to help people maintain a standard of living throughout their later life’. Following this will ensure that it all works towards the same goal.
Value for money
The pensions landscape is extremely difficult to interpret, and there’s no hard and fast rule as to what makes a good pension scheme. An exclusive focus on cost is tempting but misses other measures – ultimately this phase of the pensions system is about giving savers the biggest possible pot when they come to retire – so a wider definition makes sense.
The current work on Value for Money (VFM), led by the DWP and the regulators, is very important and will help make it clear to employers and, ultimately, to employees/savers whether their workplace scheme is likely to work for them.
One aspect that arguably should have a greater focus is governance. Good governance is imperative for ensuring that pension schemes operate in the interests of their members, and in many ways underpins all other aspects of value for money. Without thorough oversight from scheme trustees and Independent Governance Committees there would be too few checks and balances and no guarantees that investment managers, consultants and others would be held to account.
A pair of regulators…?
There are two main regulators of DC pensions. The Pensions Regulator, owned by the DWP, regulates trust-based schemes (which also includes defined benefit schemes); while the FCA regulates those that are contact-based. This creates a division in governance standards, with trustees having a fiduciary duty to act in their members’ best interests, whereas Independent Governance Committees are subject to the FCA’s regime. There are pros and cons of each approach, but it further confuses the choice faced by employers.
This is intrinsically linked to the Value for Money debate. Although implementing a system of VFM is a process that will at first be aimed at naval gazing within industry (so schemes can compare themselves) and only then move to help employers – and hopefully ultimately individual savers – it is an essential prerequisite for improving the pensions marketplace. If the Government achieves its ambition, the clouds will lift over the pensions landscape and the view will become clearer for decision makers.
Or just one regulator?
This provides the background on why we need a single DC pensions regulator. A singular approach with consistent standards across all schemes would help employers and ultimately savers. Ideally, the best of both the trust and contract-based worlds could be brought together and provide governance synergies, holding investment managers to higher standards on both fees and performance, while giving schemes more flexibility to help their members without needing to re-write the rules around financial advice and guidance (doing so may well be disadvantageous to savers, but that’s another discussion entirely!)
The single regulator should be a new entity, designed to overcome any cultural biases that exist within FCA or TPR, and should oversee the auto-enrolment compliance process currently under the auspices of TPR. The FCA would continue to regulate the rest of the financial services industry, including insurers’ other operations, while defined benefit schemes would remain governed by TPR.
Although this is a technocratic change, it is one that is ultimately in the interests of savers as it will provide a clear, tailored regime to manage DC savings. Saving into a DC scheme is very often a significant step down from a DB pension in terms of outcomes, so protecting this is important, and the regulator regime should support the ‘north star’ objective wherever possible.