The UK’s pensions association has called for “radical” measures to increase scale, standards and accountability of governance of UK pension schemes, including bringing about consolidation via “an element of compulsion”.
It made the comments in its response to a consultation by The Pensions Regulator (TPR) on trustee standards and governance, which closed on Friday.
Luke Hildyard, policy lead for stewardship and corporate governance at the Pensions and Lifetime Savings Association (PLSA), said the association was largely supportive of the regulator’s proposals but did not believe “these relatively subtle changes alone are sufficient to achieve a governance structure that will achieve the best possible value for scheme members over the long term”.
He added: “Against a backdrop of significant challenges for pension schemes – from an increase in the number of stakeholders brought into pension savings through auto-enrolment, to deficits in the defined benefits pensions – there is a need for radical measures in terms of the scale, standards and accountability of governance structures.”
One of the questions asked by TPR was how pension funds with “sub-standard” governance should be dealt with, and, in particular, whether smaller schemes should be encouraged or forced to exit the market or merge with other schemes.
In its submission, the PLSA, which has long been in favour of increased scale in UK defined contribution (DC) schemes, cited “well-documented” benefits of scale, such as value for money, an ability to attract higher-calibre trustees and better governance.
“In an ideal world, consolidation would occur through market forces, but progress has been slow in this respect,” it said.
“As such, an element of compulsion – as has been applied in other markets – would now be appropriate.”
Giving the Netherlands, Australia and Denmark as examples, the PLSA said that, “[i]n the countries with the most highly regarded pension systems, numbers are much lower, and policymakers have actively concentrated on reducing them.”
The association also raised the question of whether schemes failing to deliver value for money should face compulsion in another area, namely the appointment of professional trustees.
Wider benchmarking would determine which schemes were underperforming in this way, it said.
Law firm Sackers said it would probably be “impracticable” to deal with sub-standard smaller schemes by forcing them to exit the market or merge with other schemes.
New powers would be required to facilitate scheme closures, as this is impossible under current legislation, it said – and “there is the risk that the powers could be deliberately used to offload pension scheme responsibilities more widely”.
This would be unworkable for DB schemes, according to Sackers, while for DC schemes it is unclear how the cost of scheme closure and transfer of benefits or consolidation could be met “without taking the money needed to meet costs from members’ accounts”.
“As TPR notes through its research,” Sackers added, “it has already identified some schemes as needing additional support.
“It may be appropriate for TPR to target those schemes directly, giving specific support on a case-by-case basis.”