UK: Expanding the rulebook
Pension schemes face a multitude of new regulations and guidelines
• Investors and pension managers face a huge number of new rules and guidelines from domestic and overseas regulators.
• Several of these could be hampered by a weak government with priorities other than financial reform.
• UK schemes will also have to grapple with more pan-European regulations.
The UK faces a raft of reform in occupational pensions. These measures are summarised here.
1. The Asset Management Market Study (AMMS). This wide-ranging report, published by the Financial Conduct Authority (FCA) in June, has huge ramifications for most aspects of pensions and investment management.
Investment consultants seem set to be referred to the Competition and Markets Authority (CMA), the government’s anti-trust body. The regulator’s board is due to make the final decision this month, but with strong support from pension funds (and even some consultants) it is likely to proceed.
Large consultants that also offer fiduciary management services will come under further scrutiny, given the conflicts of interest involved. The CMA is also likely to investigate whether pension schemes should be required to review their consultant relationships on a regular basis.
2. Cost transparency. The FCA’s verdict on asset managers was damning: price competition was “weak”, managers were failing to control costs, and economies of scale were not passed on to investors.
Prof Chris Sier of Newcastle University Business School, a long-time and vocal advocate of cost transparency, led a project with the Local Government Pension Scheme (LGPS) to come up with a new template for disclosure. The template – also supported by the asset management trade body, the Investment Association – aims to provide clarity on all levels of investment charges. The LGPS already expects the new reporting standard to reveal costs in excess of £1bn (€1.1bn) as it is rolled out across the 89 schemes in England and Wales.
3. Senior managers and certification regime. Initially a measure aimed at improving accountability at banks, the FCA has proposed expanding this regime substantially to include all regulated firms.
This will bring into scope asset managers – including those working in-house at the largest pension schemes.
4. Security and sustainability in defined benefit pension schemes. In the wake of two high-profile cases involving defined benefit (DB) schemes – the collapse of high street chain BHS and Tata Steel ’s threat to abandon its UK businesses – the government launched a detailed discussion about the future of DB regulation and protection at the start of this year.
The resulting government discussion paper covered many aspects of the extensive DB rulebook, including: how pension increases are calculated; how to facilitate scheme consolidation; and the potential wider use rules allowing schemes to be spun off from their sponsoring employer.
5. Auto-enrolment. The final phase of auto-enrolment’s rollout is under way, with hundreds of thousands of the UK’s smallest businesses now required to set up pension arrangements.
The government has also voiced its desire for self-employed workers to be brought into the auto-enrolment regime. On top of this, the minimum contribution (combining employee and employer payments) is due to rise to 8% by April 2019, from 2% currently.
6. The Pensions Dashboard. In an effort to improve engagement with pension saving, the industry is developing a ‘dashboard’ to allow workers to see all their savings in one place. The project, led by the Association of British Insurers, is still in the development stage and there are significant hurdles to negotiate.
7. Master trust regulation. The Pension Schemes Act 2017 was passed into law in April. It brings in new requirements for master trusts to ensure providers are properly authorised and have sufficient protections in place for members.
8. Post-retirement provision and pension freedoms. April 2015 saw the removal of the requirement for UK retirees to buy an annuity with their defined contribution pots. While it has freed hundreds of thousands of people from being tied in to ultra-low annuity rates, there are major question marks over the alternatives.
9. The state pension. In July, David Gauke, the newly appointed work and pensions secretary, announced that the state pension age would increase to 68 between 2037 and 2039, seven years earlier than initially planned. The government also outlined further increases that could mean the state pension age hitting 70 by 2056.
10. European regulations. In common with pension funds across Europe, UK schemes must also grapple with the implications of several continent-wide regulations.
The Institutions for Occupational Retirement Provision (IORP) directive’s impact hinges on the UK’s future relationship with Europe, according to the PLSA, but schemes are unlikely to escape much of the rest of the current regulatory pipeline.
The main effect of the second version of the Markets in Financial Instruments Directive (MiFID II) for asset owners will revolve around who pays for research costs – at the time of writing, most UK asset managers had yet to decide. The implications of the European Market Infrastructure Regulation (EMIR) could be more meaningful: the potential increased cost of derivative trading is likely to affect liability-driven investment providers.