UK pensions regulation out of step with international practice

An independent report written for the National Association of Pension Funds (NAPF) has found four areas where UK pensions regulation is out of step with international practice.

The report compared key elements of the UK regulatory framework for private pensions with those in five other OECD countries which have large private pension sectors: Australia, Germany, Ireland, the Netherlands and the USA. These elements included design rules, benefit security and governance.

The report identified a number of regulatory issues that require further analysis and potentially regulatory reform. The key findings from the report included the issue of DB inflation proofing, the regulation of employer covenants in DB, governance requirements and DC contract-based provision.

The report found the mandatory inflation proofing in the UK is out of step with regulation elsewhere and makes the defined benefit (DB) promise far more expensive than in other countries.

It also found the UK has unparalleled regulation of the DB employer covenant when compared to the regulatory regimes used elsewhere. If mandatory indexation was removed it would be easier to apply higher funding levels which would reduce the need for such strong regulation of the covenant, says the NAPF.

Furthermore, the UK requirements for governance in trust-based schemes are high and are only exceeded in countries where most pension schemes are very large meaning consideration should be given as to whether the UK’s approach is proportionate.

The report also pointed out that the regulation of contract-based schemes, especially group personal pensions, is out of line with the regulation of similar DC schemes in most other countries. Consideration should be given to the wider use of management committees, default funds and annual reviews.

Nigel Peaple, NAPF director of policy said: “Comparing UK regulation to that in other countries gives a fresh and objective perspective. The study shows we need a more flexible approach for DB schemes, especially regarding indexation and the employer covenant.

“As for DC schemes we need to think carefully about how best to achieve high standards of governance over both trust based and contract-based schemes. We hope the analysis will help promote informed discussion on how the regulatory framework in the UK should evolve in the future.”