RegulationMay 30 2013

Watchdog worries

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

To promote such regulation, the House of Commons work and pensions committee recently published a report on improving governance and best practice in workplace pensions. One of the report’s key recommendations is a call for a single watchdog to oversee all workplace pensions. What, if anything, is wrong with the current regulatory framework and will a single regulatory body be able to restore public confidence in pensions?

High-quality governance and regulation – which protect individuals and focus on maximising retirement income – are vital to avoid a collapse of confidence in the pensions system.

To promote such regulation, the House of Commons Work and Pensions Committee recently published a report on improving governance and best practice in workplace pensions.

One of the report’s key recommendations is a call for a single watchdog to oversee all workplace pensions. What, if anything, is wrong with the current regulatory framework and will a single regulatory body restore public confidence in pensions?

UK workplace pensions are currently subject to the oversight of three regulatory bodies. The Pensions Regulator is responsible for regulating the running and management of all workplace pensions. With the abolition of the FSA on 1 April this year, the Financial Conduct Authority now regulates conduct in contract-based pension schemes and the Prudential Regulation Authority promotes the stability of large insurance firms – including providers – that offer contract-based workplace pensions.

However, those familiar with the criticisms of the now-superseded three-sided structure responsible for financial stability in the UK (comprising the Bank of England, the Treasury and the former FSA) will not be surprised to hear the concerns raised by the committee’s report about the regulation of workplace pensions.

The shared regulatory responsibilities require TPR to work together with the FCA and the PRA. The report cited demands for better co-ordination between the regulatory bodies and for the government to play a role in getting the parties around the table to set agreed quality standards.

However, there appears to be duplication of work by the regulatory bodies.

The report was highly critical of the FCA’s resources available to devote to pensions. Its predecessor had a team that dealt specifically with pensions policy, but admitted it did not have staff dedicated to regulating pension schemes or a specific pensions strategy. Its approach was to focus resources wherever it perceived the biggest risks to be at any given time. It had, therefore, dedicated much of its recent resources to the banking sector, which it considered high risk.

The committee questioned whether the FCA will have sufficient resources in the future to apply to pensions at a time when pension provision will increase significantly on account of auto-enrolment.

TPR’s principal (and headline-grabbing) regulatory burden is defined benefit pension schemes – one of its statutory objectives is to reduce the risk of DB schemes being bailed out by the Pension Protection Fund. Trends in pension provision have shifted from DB to defined contribution and, within DC, from trust-based to contract-based pension schemes. The National Audit Office estimated that, in 2011, 9 per cent of employees in the private sector were active DB members, another 9 per cent were active trust-based DC members and 14 per cent were active contract-based DC members. TPR is rebalancing towards DC, yet it spent only an estimated 22 per cent (approximately £6.7m) of its resources in 2011/2012 on DC generally, although this is expected to increase in 2012/2013 to 32 per cent.

The report also raised concerns that there are gaps in the regulation of pension schemes. Far from there being an unregulated Wild West of pensions landscape, there is more of a regulatory overlap than a gap.

TPR has a statutory objective to protect members’ benefits in all workplace pension schemes. The anomaly is that while TPR has a wide range of statutory powers to tackle trust-based DC schemes – for example, removing and replacing trustees – it has limited powers in relation to contract-based DC schemes.

So, although TPR issues guidance on all workplace DC pension schemes, in reality its role is limited to the policing of trust-based ones. The enforcement of standards within contract-based DC schemes falls to the FCA.

Inconsistencies arise from having two separate regulatory bodies for DC schemes. Providers of contract-based DC schemes – along with all other companies regulated by the FCA – must abide by the FCA’s Treating Customers Fairly initiative, which requires firms to focus on six outcomes for customers. Meanwhile, TPR promotes its Six Principles for Good Workplace DC guidance across the DC spectrum.

Both sets of principles are broadly aligned in their focus on good customer outcomes, but there are discrepancies because the FCA’s principles apply to the whole financial services sector and are not specifically tailored to pensions. TPR has no power to enforce its six principles over contract-based schemes, and the FCA has made it clear that it has no intention of adopting those principles.

Therefore, providers of DC schemes will be held to different standards depending on whether they are trust-based or contract-based, resulting in consumers in one or other scheme experiencing different standards of regulation.

While there may be no regulatory gaps under the current framework, there is also no single regulatory body leading on the regulation of DC schemes and ultimately accountable for the delivery of regulation. Should there be a single pensions watchdog?

The committee clearly thinks so, and it makes sense that a single regulator for workplace pensions would bring overarching objectives and a common system for making evidence-based assessments of risks to members.

Nonetheless, TPR and the Treasury have rejected the report’s demand for a single regulator. The barriers to the creation of a single pensions regulator appear to be more practical.

The Treasury is understandably reluctant to make further changes to the pensions landscape in the midst of auto-enrolment, and so soon after the disruption resulting from splitting the FSA. Pensions minister Steve Webb is also opposed to the idea.

Finally, increasing the resources available should be a priority and would not be automatically achieved by redirecting the resources from the existing regulators (aside from the reduced cost of duplication of work).

Shuffling around funds – which the report recognises are already insufficient – would not increase them. It is for the government to decide that the risks of workplace pensions, particularly DC schemes, need to be more strictly regulated.

Danny Tsang is a pensions partner and Richard Pilsworth is a senior associate of law firm Simmons & Simmons

Key points

The House of Commons Work and Pensions Committee recently published a report on improving governance and best practice in workplace pensions.

TPR has a statutory objective to protect members’ benefits in all workplace pension schemes.

TPR and the Treasury have rejected the report’s demand for a single regulator.

.