Taking the regulators to task
In this month’s ‘Off the Record’ we asked about that most onerous of responsibilities – meeting the requirements of the regulator.
No mean feat by all accounts… oops... did I mention accounts….
Seventy-five per cent of this month’s pension fund respondents say that regulations are one of their greatest causes for concern, which seems to suggest that this no flash-in-the-pan worry.
And the main issues appear to concern accounting and information requirements. Around two-thirds of recipients say they are overwhelmed by the reporting necessary for these two areas of pension scheme governance.
Any regulators reading this should start taking notes now.
One respondent is put out by the work involved in meeting such requirements compared to the lack of feedback in return: “Regulatory filings are cumbersome and time consuming with little or no feedback from the regulators.”
Most worrying though are the comments of one fund manager, who warns that the board of the plan is discussing FRS17 issues for the fund and that the outcome may not be positive: “It will be discussed in the next couple of months by the directors and this could prompt us to close our final salary scheme to new members.”
The nail-biting does not stop there.
Liabilities are a preoccupation for 58% of you, closely followed by issues of membership. Investment burdens appear of slightly less concern, with 42% of you flagging these up. At least, membership problems and vesting rights concerns don’t keep you awake at night.
A number comment that the above distractions are proving increasingly problematic in terms of the cost of producing a good quality pension scheme.
Other issues mentioned include topics such as pension splitting on divorce, cross-border membership of plans, contribution worries, AVCs and that old bugbear – tax.
And it would seem that far from seeing these as a necessary evil in insuring that pensions are properly protected, many feel some legislation is counter-productive.
Surely not? Well yes, 66% of respondents state that there is at least one piece of misguided legislation in their market.
Unsurprisingly, the UK’s minimum funding requirement (MFR) appears at the top of many UK pension scheme replies.
The suggestion is that the government initiated Myners report may not be the solution here either. One manager decries “MFR in both its current guise and proposed reform.” Another adds: “MFR in its current form is not suitable for many schemes and does not serve its original purpose to ensure all promises are secure.”
MFR type legislation it seems is not just furrowing brows in the UK though, with another pension fund head from the Netherlands, adding that new actuarial principles there fit into this class of bad law.
Unsurprisingly, tax makes another appearance with a reply citing the “highly problematic” difference in methods used by countries for taxing contributions, investment increases and benefits.
One thing is certain – you don’t see the answer as lying in more regulation!
Most pension funds would just like to get on diligently with the job in hand, encountering the minimum amount of fuss, as one manager notes: “In fact, self-regulation should be adequate here, with plan sponsor and trustee working together to ensure fairness.”
Only one respondent thought the current wrongs could be righted by new laws, although this came more as a point of clarification on details regarding the co-existence of DB and DC plans.
It is DB plans, however, that take the brunt of such overarching legal structures, with over half of you putting forward the view that the traditional final salary plan is being constricted. A third of pension schemes believe this to be unreasonable, but the view is not universal, with 16% arguing that this is a perfectly normal state of affairs.
More worrying though is the fact that a fifth of respondents have considered changing from defined benefit to defined contribution plans as a result of such anomalies.
However, most concede that this is part of a wider picture.
One scheme says its re-evaluation of the pension plan was: “80% to address the issue of demographics and 20% regulatory concerns.”
Another notes: “We are not changing at present, but we may do as an alternative to reduce costs as well as the regulatory aspect.”
Unfortunately, things look likely to get worse rather than better on the regulation front. Eighty-three per cent of you expect more national legislation concerning pension funds, giving a list of areas – accountancy, auditing, investment policy, solvency and fiscality – where this is likely to occur. Just under half of respondents feel this will push up the cost/liability aspect of the scheme.
And the overall outcome is seen as neither a positive step for the scheme member nor the plan sponsor, with only 16% believing this will help either in any shape or form. A slightly damning indictment there.
Can pension funds look to a homogenised Europe, then, to bring down regulatory barriers and lower costs? Well… “not sure really” seems to be the consensus.
A quarter of pension fund chiefs believe EC regulation will impose further burdens, but the underwhelming response from the majority is that they just don’t know what European intervention has in store for them . Perhaps a look in the IPE archives might help.
Let’s not forget, the ‘Off The Record’ replies are international and some schemes know that Europe is not playing in their backyard yet: “Europe won’t affect us, at least not until Switzerland gets closer to the EU.”
Perhaps more important, however, is the attitude of plan sponsors in the regulatory equation. We asked you whether additional rules have an impact on sponsors’ attitudes to pension funds. The resounding answer was yes, with 67% of scheme managers noting that they were under scrutiny on the back of any move in the regulatory environment. The same number say that this would likely involve complying with the legal changes but with steps being taken by the company to reduce costs as a result.
Around 40% of you believe that employees would certainly suffer as companies seek to either reduce or restrict benefits.
Only a fifth of replies note that restriction of plan membership might occur but a quarter say the plan might close completely.
Only a solitary voice opines that the company would react positively to any changes and expand scheme membership and benefits.
The responses are indicative of the way many pension plan heads view the powers that be.
We asked next whether you thought pensions were well understood by politicians. Revenge is sweet, after all…
Replies were unequivocal; over 80% said they suspected that their countries’ elected representatives hadn’t a clue about what the business of pensions entails!
One manager captured the wider sentiment in a nutshell: “It is difficult to convince politicians that they have to take an unpopular decision.” Another respondent had perhaps overlooked the democratic possibility of voting out politicians, convinced that they were there for life and thus had no concept of changing occupational pension provision: “Politicians still have the same job and employer for lifetime.”
Regulators fared somewhat better in approval than their elected counterparts – with approximately two-thirds of you commenting that they knew their responsibilities well.
One might ask why this did not come out at 100%, considering the intrinsic importance of such positions, but a regulator is a regulator, after all, and who else can you have a go at?