Contract-based DC 'fundamentally at odds' with auto-enrolment
UK - Asset managers and insurance companies should be subject to the same fiduciary responsibility as pension fund trustees, FairPensions has argued, as it warned that the absence of such duties meant contract-based pension arrangements was "fundamentally at odds" with automatic enrolment.
In its latest report 'Whose duty? Ensuring effective stewardship in contract-based pensions', the lobby group noted that due to the inertia assumed in auto-enrolment, savers would not be making active choices in contract-based schemes and would unlikely to be in a position to evaluate the investment arrangement they had been placed into.
It argued that the introduction of super trusts, backed by the National Association of Pension Funds (NAPF), offered many advantages, with the not-for-profit approach pursued by the vehicle one potential advantage over contract-based arrangements.
Raising the question of if master trusts could be used to address some of the concerns, the report was uncertain, stressing that while the master trust allowed for fiduciary responsibility, the trustee board was "effectively accountable" to the commercial provider
Report author and FairPensions' head of policy and research Christine Berry said that she wasn't suggesting master trusts were the answer to existing problems, rather than the paper looking to launching a debate on what approach best served members.
She argued that it was "not just necessarily forcing contract-based schemes to put a trust label on them, as if that will suddenly make all the difference."
"It is more complicated than that," she added.
The report continued: "The absence of fiduciaries makes it unclear who in the contract-based chain is charged with looking after the best interests of the saver.
"Our analysis suggests that nobody has a clear responsibility or incentive to do this, leaving the potential for an oversight deficit at each link in the chain [of investment intermediaries]."
Berry said that some of the problems stemmed from the current regulatory system, with the incoming Financial Conduct Authority (FCA) - the result of a split of the Financial Services Authority (FSA) that will see responsibility for banking regulation transferred to the Bank of England - not able to intervene.
She noted that as fiduciary responsibility was a common law issue, both the FSA and FCA saw responsibility to persecute for mismanagement resting with the wronged individual, saying that only amendments to the Financial Services Bill to include fiduciary duty would make it "legitimate" for the supervisor to take action.
Berry argued that it would be in the industry's long-term interest to take a more "enlightened" approach, arguing that the recent report by John Kay on long-term investing supported some of the organisation's claims.
"Fiduciary duty, as Kay points out, is not inconsistent with being a commercial entity and making a profit. What it is inconsistent with is profiting at the expense of consumers without consumer's consent," she said.
She added that once people were fully understood the distinction her report stroke to highlight, they would "rightly" question ongoing resistance to changes in the law, with the report also calling for insurance companies to establish new governance guidelines that placed scheme members in the same place they inhabited within a trust-based fund.