Auto-enrolment's success depends on product quality, regulator says
UK – A strong defined contribution (DC) pensions market underpinned by quality products is the way to ensuring a large take-up of workplace pension schemes, the Pensions Regulator (TPR) has said.
Addressing the annual meeting of the Occupational Pensions Defence Union (OPDU) this week, TPR chairman Michael O'Higgins said: "We want large employers and their advisers to help create demand for products that incorporate the principles and quality features, and this will help influence market behaviour."
O'Higgins hinted that this could lead to a de facto government-backed quality mark.
"We see quality DC as a key component in delivering successful automatic enrolment, and disclosure against our DC principles by providers will help to give employers confidence that schemes they choose for their workers meet certain standards," he said.
He said TPR would like to see schemes adopt a 'comply or explain' disclosure framework to demonstrate how they comply with the DC quality features, or to be able to explain any inconsistencies.
Earlier this month, TPR launched a consultation on the future regulation of DC funds, outlining more than 30 quality features trust-based DC funds should encompass in future.
These cover issues of governance, investment and value for money.
O'Higgins emphasised that master trusts would be encouraged to obtain independent assurance that could help demonstrate the presence of DC quality features in a scheme.
He said: "This is reasonable given the numbers of people expected to be automatically enrolled into this segment, and the risks that need to be mitigated such as low barriers of entry for new providers, with business models predicated on attaining scale, and the potential for conflicts of interest where the trustees are closely associated with the provider.”
O'Higgins also explained why TPR's consultation did not apply to contract-based schemes, which has attracted criticism from some sections of the pensions industry.
He said TPR wanted all work-based DC schemes to embrace the regulator's principles – including governance, administration and communications to members – and its DC quality features.
But the regulator's legal powers to intervene under pensions legislation apply primarily to trust-based schemes.
The primary regulator of product providers and fund managers involved in work-based personal pensions – in other words, contract-based schemes – is the Financial Services Authority.
However, O'Higgins said TPR would carry out reviews checking for the presence of the principles and quality features across different types of scheme, and look to providers of work-based personal pensions to demonstrate the effectiveness of the systems, controls, risk and compliance monitoring process.
It would also agree joint working protocols with the FSA's successor bodies.
O'Higgins also referred to indications that automatic enrolment is having a positive effect on value for money.
However, he said TPR's analysis had shown that, in some segments of the market, employers and retirement savers lack the knowledge and engagement levels to demand good value for money products.
And he promised there would be more guidance from TPR in relation to defined benefit funding.
He welcomed the wider debate prompted by the Department for Work & Pensions' recent call for evidence covering the use of smoothing for the calculation of assets and liabilities, as well as a statutory requirement for the regulator to consider the affordability of deficit recovery plans for sponsoring employers.
He said once it was clear whether the regime would be altered, TPR would provide a further statement for schemes in 'Tranche 8' (schemes with valuation dates between September 2012 and September 2013).