Detailed examination

As defined contribution becomes UK plc\'s principal workplace pension model, employers, advisers and providers can expect to have to do more to make sure they are suitable says James Phillipps

Defined contribution schemes are set to come under closer scrutiny from the Pensions Regulator over the next three years.

TPR published its second corporate plan last month and said “developing and implementing its DC regulation approach” will be one of the four key themes it will focus on.

The regulator came under fire from the House of Commons Committee of Public Accounts in March over what the parliamentary body perceived as its failure to tackle the risks to DC members.

Although the Committee praised TPR’s work regarding the regulation of defined benefit schemes, it said it believed this had come at the expense of DC arrangements.

The criticisms were wide-ranging, with the CPA disparaging about the lack of detailed information the regulator possesses on the 81,000 smaller DC schemes and the lack of focus on them. It also expressed concerns about standards of governance and trusteeship and member communications.

Andrew Cheseldine, senior consultant at Hewitt, says much of the criticism was unfair as the TPR necessarily focused on DB schemes in its first three years because of their size and the fact that that is where the majority of the risk resided.

“The Committee made the classic mistake of not understanding the difference between the risks faced by DB and DC schemes,” he says.

“The TPR was also unfairly castigated for things that are not its responsibility, such as member communications, which is really the FSA’s job.”

This was reflected in the five point action plan that the TPR has drawn up as a roadmap of its plans for DC regulation.

Tony Hobman, chief executive of TPR says it will work closely with both the FSA and Thoresen Review to improve member understanding of benefits and work in tandem with the FSA on issues around default fund design and member communications.

He says TPR will make improving governance standards a priority, however.

Hobman told the Committee: “We are starting to move on the governance of DC schemes from the phase where we have been finding out what is wrong, establishing what is wrong, playing back to the market what is wrong and now doing something about it in terms of the products that we produce.

“A lot of the guidance that we are now producing and will produce through next year for trustees, particularly on the governance areas that we have highlighted as being particularly key, will be full of best practice examples.”

Glenn Thomas, managing director of Jelf Corporate Consultancy, believes that one of the outcomes of this could be that pensions committees are recommended as best practice.

The CPA queried the lack of member involvement in TPR consultations and Jelf is advising its clients to establish pensions committees that incorporate employee representatives to be ahead of the curve.

“Pensions committees have limited ability to influence issues around the running of a scheme, but it is good practice and they can monitor admin and service levels and develop initiatives to improve member take-up,” he says.

“Over time, even if pensions committees do not become mandatory, employers could face issues if they don’t support them.”

Rachel Vahey, head of pensions development at Aegon Scottish Equitable, says taking a broad-brush approach to the running of DC schemes is flawed. She argues that what may suit the 1,000 member plus pension scheme of a blue chip company may not work best for a small business’s five-member arrangement.

“You may get an employer committed to making a 6 or 7 per cent contribution but unwilling to set up a governance committee. That is much better than having an employer that makes no effort. You cannot say that something should be best practice for DC schemes when there is such a variety. It has to be what suits individual schemes the best,” she says.

Regardless of the size of the scheme, its trustees are set to be targeted in the coming years as part of TPR’s governance drive. The low take-up of its online trustee training course was highlighted during the Committee session and the regulator is to launch a marketing drive to flag up this service. Poor admin standards are similarly in its sights.

“The CPA has put pressure on the TPR to beef up its trustee regime but you may have an occupational DC scheme with adequate but not wonderful governance, which pays a 10 per cent employer contribution. The major risk is that if the regulation becomes too onerous, the employer will walk away and the member loses out,” Cheseldine says.

Experts note that with personal accounts looming on the horizon, there are growing concerns that companies have a ready-made get-out clause from their existing schemes if TPR is too draconian in its approach to DC regulation.

“The regulator has to realise that it is looking at employers which have set up schemes and are contributing for their employees. It needs to consider how it takes regulation forward without putting too much pressure on these companies or many will fall into the personal accounts regime,” Vahey says.

Thomas agrees, noting that few employers reduce their contribution rates when switching from trustto contract-based schemes, for example, but he warns that personal accounts could be viewed by some finance directors as an easier way to cut payments while heaping the blame on the Government or regulator.

“Without personal accounts on the horizon it would be unlikely to have an impact but with personal accounts around the corner there is the potential that companies will look at reducing contributions. Personal accounts are definitely a danger,” he adds.

The possibility that more onerous regulation will push companies into personal accounts could be bad news not only for employees currently in superior schemes, but also for advisers, who could lose clients.

Ensuring clients are prepared for the potentially more rigorous examination of their governance practices could be a major step towards retaining their business.

expert view – Rachel Vahey, Head of pensions development, Aegon Scottish Equitable

Concerns that the Pensions Regulator could clampdown on trustees are likely to accelerate the move away from trust-based money purchase schemes to contract-based arrangements.

Glenn Thomas, managing director of Jelf Corporate Consultancy, has been advising clients to make the switch for several years. He says it is difficult enough to find and replace trustees in the current climate and the situation will only get worse if their roles are placed under even closer scrutiny. He points to one client, a bus company, which had a trust-based money purchase scheme with three trustees. Jelf recommended that they complete TPR’s online trustee training course. Two of the three did and immediately tried to resign their posts. “The employer was unable to find any replacements and is now winding the scheme up and moving to a contract-based arrangement,” Thomas says.

“This is by no means an isolated case and even most member-nominated trustees do not want the role once they understand the responsibilities involved.” Rachel Vahey, head of pensions development at Aegon Scottish Equitable, says the understandable reluctance of many employees to taking up the position has led to a huge rise in the rates charged by independent trustees.

She says: “They have become very expensive and who is going to pay for that? If the employer is struggling to get voluntary trustees and there is no cost-effective way to bring in independents, then the employer has to look for alternative avenues.”

The danger for many people in trust-based money purchase schemes with decent employer contribution rates is that personal accounts may well be the easiest answer.Trust, contract or personal accounts?

Tony Hobman: TPR will make improving governance standards a priorityspotlight

TPR – The Westminster view – Edward Leigh MP, chairman, Public Accounts Committee

The House of Commons Committee of Public Accounts has been critical of the Pensions Regulator’s progress regarding defined contribution schemes.

In its March report into TPR’s progress, it said the regulator needs to improve the standards of scheme governance and member communications and be more willing to bare its teeth when needed.

The CPA pointed out that while TPR has information on 99 per cent of defined benefit schemes, it only holds data on 32 per cent of DC schemes.

Although the Committee accepted that the regulator had to take a risk-based approach, it said the initial focus on defined benefit schemes and the largest 150-300 DC schemes meant there was insufficient attention paid to the 81,000 smaller money purchase arrangements.

TPR came under further fire over these smaller schemes because despite it having set out its regulatory expectations, it emerged that 40 per cent have no policy in place to identify risk and less than a third have conflict of interest registers.

The CPA said: “TPR has defined good governance but standards remain low in many schemes, particularly among small schemes. TPR should raise awareness within these schemes of the standards it expects and the assistance available.”

Take-up of that assistance disappointed the Committee. Only 15 per cent of trustees have registered for TPR’s free online training course and the majority of these failed to complete all of the modules. Despite this, TPR has only disqualified one trustee, which the CPA said raises questions about its willingness to take enforcement action.