The UK’s Pensions Regulator (TPR), in an effort to improve governance standards across the sector, has suggested “sub-standard” pension funds should be forced to merge with others.
In a wide-ranging consultation on trustee standards and governance, the regulator also asked whether professional trustees should be required to complete minimum qualifications before registering.
The regulator noted that, while many trustee boards were displaying dedication and skill when conducting their work, some were failing to meet minimum standards, or finding it “challenging” to do so.
Lesley Titcomb, the regulator’s chief executive, emphasised that trustees had a “vital job” protecting savers’ money.
“Being a trustee carries significant responsibility, so it’s important trustee boards display sufficient skills and knowledge, and follow effective stewardship principles,” she said.
“But good practice is far from universal, and the challenges are particularly stark in smaller schemes.”
The notion of improving trustee standards comes just after the revised IORP Directive was finalised.
The directive requires member states to raise the level of trustee experience across a trustee board as a whole – a condition that has led the Irish regulator to propose stricter entry requirements.
Titcomb’s note of caution that smaller schemes could face challenges was also addressed in the paper, which asked whether such funds should be encouraged or required to exit the market, transferring assets to larger-scale providers.
“Is regulatory intervention required to facilitate this,” the consultation asked, “or can it be achieved through existing market forces?”
The idea of mandatory consolidation within the pensions sector appears to enjoy the backing of former pensions minister Ros Altmann, who told IPE earlier this year she would like to “see more mergers of schemes to get economies of scale”.
“We’ve started on that in local authorities, and there is room to go for small DB [defined benefit] schemes in the private sector,” she said. “I would expect to see more of that.”
As Altmann noted, consolidation has most recently been put into action within the local government sector, where English and Welsh funds are in the process of pooling assets into eight distinct arrangements with up to £35bn (€40.7bn) in assets.
TPR itself has previously argued only larger-scale funds should be used for the purposes of auto-enrolment, by default encouraging the growth of larger and better-governed providers, while the opposition Labour party suggested in 2013 the regulator be given powers to bring about consolidation in the defined contribution (DC) sector.
However, the notion this should be expanded to the DB sector is a new one for the UK, where the Pension Protection Fund acts as a consolidator by absorbing the schemes of failed companies, growing to £23.4bn (€29.7bn) in assets as a result.
To a lesser extent, the de-risking of UK DB provision – and the transfer of assets to insurance companies – is also acting to consolidate the sector’s assets.
In the Netherlands, the regulator has long supported the benefits of scale.
As a result, the number of schemes in the market has fallen by nearly half over the last decade as schemes join forces with larger ones – such as SPF, the €14bn pension fund for railways, and SPOV, the €3.4bn pension fund for public transport’s planned merger.
Ireland has also begun discussions about how the market should be rationalised, ahead of the expected rollout of auto-enrolment reforms.
TPR did not offer up any potential solutions on how consolidation should be brought about, instead asking the industry for responses by 9 September.