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Top 1000 Pension Funds: All hands on deck

The UK pension industry is changing across the board, emphasising the importance of improving regulation, governance and fees structures, Jonathan Williams reports

The regulator and the Department for Work & Pensions (DWP) are working on a range of initiatives to reform workplace pensions. But as pensions minister Steve Webb steered the debate towards defined ambition, quality thresholds and governance in defined contribution (DC), the industry remains focused on the effects of low Gilt yields on the defined benefit (DB) sector.

Following a prolonged campaign for change, the government accepted the need for the pensions regulator (TPR) to have a fourth statutory objective, explicitly acknowledging its duty to maintain solvent sponsors alongside its responsibility to protect the Pension Protection Fund (PPF), and assure that member benefits are protected. However, the same consultation led to the DWP rejecting any element of discount-rate smoothing, despite some interest in the Dutch ultimate forward rate.

May’s draft Pensions Bill 2013-14 will require TPR to “minimise any adverse impact” on a company’s sustainable growth while exercising its duties. The regulator is now considering how to fulfil this requirement, and will publish its new approach by the end of 2013.

The same bill also amends the £31,380 (€35,854) cap on benefits paid by the PPF. The change, which is not retroactive, will allow a 3% increase in benefits for each year beyond 20 years that a member has contributed to a DB scheme. A cap will remain, but long-serving members will now be able to draw up to twice the standard cap.

However, the most profound change in the bill is the long-promised shift to a single-tier state pension.

From 2016, retirees will receive the new pension and workers will no longer accrue any benefits through the state second pension (S2P). Due to the end of S2P, DB funds will not be able to contract out of the state pillar, increasing national insurance contributions.
However, unlike the current state pension, which increases in line with either inflation, earnings or 2.5% – whichever is the higher – the new single-tier pension will increase in line with earnings.

Significant change is also on the horizon for the Local Government Pension Scheme (LGPS). The 2014 amendments in the Public Service Pensions Act in April are still under discussion but will shift the funded pillar of public sector provision to career average.
Increases in employee contributions, meant to put funds on a sustainable footing, have also been agreed, but many other details of the reform are still outstanding. Therefore, there is an allowance in the Act for changes to be introduced as regulation rather than as legislation.

Also, the Department for Communities and Local Government is examining the possibility of common reporting standards and how best to lower costs – the June consultation hinted at possible fund mergers.

The DWP has also continued to pursue Webb’s agenda to automatically consolidate forgotten or inactive pension pots under £10,000 (€11,615). As part of ‘operation big fat pot’, the department will introduce minimum quality standards for funds able to accept small, dormant pots. Allowances for regulation in the area were introduced along with the draft Pensions Bill, but the industry is still being consulted on what would define ‘quality’.

An emphasis on lower fees and better governance seems inevitable, as July’s consultation included questions on the feasibility of provider and scheme-wide governance boards for contract-based pension provision. Webb also confirmed that he will launch a consultation on fee caps for default investment options, spurred by an Office of Fair Trading investigation into competition in the DC market.

In January, TPR began a consultation on the standards of quality in DC that employers and trustees should be monitoring. A revised draft in July included issues such as a default fund’s investment approach and member engagement. Assessments will be on, for example, whether members are regularly made aware of their investment strategy “and what this means for them” – a shift away from communication that would suggest regular investment reviews on part of members. According to TPR, the amended wording came about because of concerns that members would otherwise be “prompted into making inappropriate investment decisions”.

A consultation on a DC code of practice also considered stricter regulation of master trusts – a recognition of the importance of the multi-employer option in the wake of auto-enrolment.

However, the regulator’s final response did not include any firm conclusions on the proposed independent assurance framework, initially greeted with concerns that it would increase costs for members. Instead, the regulator said it would work with the Institute of Chartered Accountants in England and Wales to devise “robust” control objectives.

On the subject of master trusts, in July the government committed to lifting restrictions on the National Employment Savings Trust. Contrary to calls from unions and the work and pensions select committee, contribution caps and transfer bans – excluding ‘pot follows member’ transfers – will remain in place until 2017.

Continued regulatory upheaval can be expected as the DWP strives to guarantee adequate scheme quality for auto-enrolment funds, while over the next few years there will be significant change in the LGPS as details of the revised scheme are finalised, and mergers or further co-operation is agreed.

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