List of Conclusions and recommendations
In this List, conclusions are set out in plain type
and recommendations, to which the Government is required to respond,
are set out in italic type.
Scheme governance
1. We
welcome auto-enrolment as an important step towards helping more
people in the UK save for their retirement. However, an increase
in the number of employees, especially those with low incomes,
saving into DC schemes and bearing most of the risk of pension
savings themselves, reinforces the importance of ensuring that
all private sector pension schemes are well-governed and protect
their members while also assisting them to achieve positive outcomes
for their retirement income. (Paragraph 19)
2. We are concerned
about the potential for some people to be auto-enrolled into schemes
with poor governance. Governance is a particular challenge for
DC schemes, and it is this type of scheme that the vast majority
of employees will be auto-enrolled into. We accept that not all
trust-based schemes are well-run and that some contract-based
schemes are already well-governed. However, there are inherent
weaknesses in the mechanisms for governing contract-based schemes
which the Government and the regulators must address, to ensure
that members of contract-based schemes are offered the same level
of protection from detriment as members of trust-based schemes.
(Paragraph 27)
3. We believe that
establishing governance committees to oversee the running of pension
schemes could go some way to increasing the effectiveness of governance
in contract- based schemes, although we appreciate that setting
up such committees may present a challenge for small and medium
sized employers. We recommend that the Government and the regulators
investigate ways of assisting all employers who offer contract-based
schemes to set up governance committees to oversee their pension
scheme and that particular attention should be given to supporting
small and medium enterprises to do so. (Paragraph 28)
4. We welcome the
emergence of Super Trust schemes such as NEST, which can provide
more protection to members than contract-based DC schemes and
can also provide benefits of scale. We support the Government's
intention to look at ways of promoting the further development
of large multi-employer schemes, including Super Trusts. However,
it is likely that many smaller employers will continue to want
to operate their own small schemes which meet the particular needs
of their workforce. We believe that the Government and the regulators
should remain focussed on ensuring that members of smaller schemes
have the same access to good governance arrangements as those
in well-run large schemes and Super Trusts. (Paragraph 34)
Costs and charges in DC schemes
Capping charges in auto-enrolment qualifying
schemes
5. We
welcome the trend towards providers offering lower charges to
pension scheme members. We note the Government's position that
it is prepared to wait before deciding whether to impose a charge
cap for auto-enrolment qualifying schemes because it believes
the market is currently operating well and it does not want to
prevent natural competition or cause "levelling up"
of charges. However we are very concerned by the potential for
pension scheme members to suffer detriment where schemes persist
in retaining high charges, with the accompanying potential to
reduce the amount of income people receive in retirement. In the
short term, we recommend that the Regulator carries out an urgent
review of the "outliers" with high charges, with a view
to taking action if it considers this necessary. We further recommend
that the Government carefully monitors the level of pension scheme
charges more generally and reviews its position on capping charges
in auto-enrolment schemes frequently, at least bi-annually, commencing
in 2014. It should act without hesitation if it becomes apparent
that some pension scheme members are at risk of detriment from
high charges. (Paragraph 45)
Active member discounts
6. We
are concerned that the use of active member discounts, which should
more accurately be called deferred member charges, has the potential
to reduce significantly the amount of money available to pension
scheme members in retirement. We have not heard any convincing
evidence for retaining these charges. Despite the Government's
assertion that its "pot follows member" approach for
dealing with small pension pot transfers will take care of the
problem of active member discounts, we believe that people who
do not have their pots automatically transferred also need to
be protected from the impact that higher charges for deferred
members could have on their retirement income. We recommend that
the Government bans the use of active member discounts without
delay, in order to prevent consumer detriment arising from this
practice. (Paragraph 51)
Consultancy charges
7. Some
pension scheme members are likely to end up paying consultancy
charges for advice which provides little or no benefit to them.
We are very concerned by the high level of such charges quoted
in some advisers' literature and the potential for this to reduce
significantly the size of scheme members' pension pots, and ultimately
their income in retirement. The Government and the regulators
have made it clear that there needs to be a clear benefit to employees
arising from the use of consultancy services; however, no-one
has explained how this benefit should be demonstrated. It seems
to us that the lack of transparency in consultancy charge structures
may make such a demonstration exceedingly difficult. (Paragraph
60)
8. Member-borne
consultancy charging has the potential to cause serious consumer
detriment and to damage confidence in pension saving and auto-enrolment.
While we appreciate that the costs of complying with auto-enrolment
can be a significant issue for some, especially small, employers,
and therefore that it may be reasonable in some circumstances
for some or all of the routine costs of a scheme to be borne by
the members, we do not think it appropriate, given the existence
of low-cost schemes, for members to suffer the detriment of consultancy
charges. We therefore recommend that the Government bans the use
of member-borne consultancy charging in auto-enrolment qualifying
schemes without delay. Until the ban has been put in place, the
Government and the regulators should issue clear guidance to the
pensions industry as a matter of urgency, to clarify the level
of consultancy charges that they assess as being acceptable.
(Paragraph 61)
Transparency and the effectiveness of self-regulation
9. We
welcome the work done by pensions industry bodies to encourage
greater transparency in communications about costs and charges
and their potential impact on retirement income. However we are
concerned about the lack of enforceability of these codes and
the lengthy timeline for implementing some of them and for producing
online comparison tools. We are particularly worried by the possibility
that the facility for employers to compare scheme charges will
not be available until after many have already made their decisions
regarding auto-enrolment. (Paragraph 69)
10. We recommend
that the Government review the levels of transparency across the
pensions industry early in 2014. If it concludes that employers
are still prevented by a lack of transparency from making informed
choices about the potential impact on their employees of saving
in different pension schemes, we recommend that it imposes a charge
cap on auto-enrolment qualifying schemes or on the schemes which
are not complying with the transparency codes and guidance issued
by industry bodies. We further recommend that consideration is
given to penalties and enforcement if the industry fails to self-regulate
effectively within the next three years. (Paragraph 70)
Self-regulation and annuity purchases
11. We
believe that the industry is failing pension scheme members when
they convert their pension funds into annuities. Purchasing an
annuity from a provider other than the one which holds an individual's
fund could increase their retirement income by as much as 20%
to 40%. However many people are unaware that they have the option
to shop around for an annuity. We recognise that the industry
is working to improve take up of the option to shop around and
we welcome the ABI's Code of Conduct on Retirement Income Choices
and the FSA's thematic review of annuities. (Paragraph 76)
12. We recommend
that the Government and regulators institute a mandatory system
whereby, when consumers come to purchase an annuity, their pension
provider is required automatically to supply them with a comprehensive
breakdown of all the different annuity rates available to them
from different providers, including options and rates for enhanced
and impaired life annuities. We also recommend that, as a last
resort, the Government considers taking steps to separate the
function of providing pensions schemes from that of providing
annuities. (Paragraph 77)
Communication with scheme members
13. Advice
and education can play an essential role in helping the public
understand their options around retirement saving as well as the
potential risks involved. We believe that the Government, schools,
employers, providers and outside agencies, such as the Money Advice
Service and The Pensions Advisory Service, will all need to play
a greater role in future in helping inform and educate the public,
in the context of auto-enrolment, the introduction of the new
Single-tier State Pension, and the necessity of everyone taking
personal responsibility for securing an adequate retirement income.
We urge the Government to consider how it will involve all stakeholders
in educating the public so that people will be in a position to
assess their own future retirement needs and make pension savings
decisions that will help them to meet those needs. (Paragraph
89)
14. We are pleased
to see the increased interest of the pensions industry and other
stakeholders in improving communications with scheme members.
However, we are concerned that some pension providers might be
using the excuse of "over-regulation" to avoid having
to simplify their pension communications. It is important to note
that NEST has been able to produce simple, easy to understand
information for their members while also complying with regulation.
(Paragraph 90)
15. We recommend
that the Government, the regulators and the industry work together
to agree on a communications format, using a language and style
similar to NEST's, that sets out the basic, essential pieces of
information which pension schemes should supply to their members.
This should include a clear indication for scheme members of the
implications of their current levels of contributions and current
scheme charges for their future income in retirement. (Paragraph
91)
16. A lack of knowledge,
understanding and financial literacy currently prevents people
from being able to assess their retirement income needs and make
sound decisions on pension saving. The Government must ensure
that people have the best chance of reaching adulthood with the
necessary tools to make informed decisions regarding saving for
their retirement. We recommend that the Government encourage schools
to include retirement and pension saving as part of financial
literacy education. (Paragraph 92)
The regulation of workplace pensions
Contract-based schemes
17. FSA's
approach to regulating financial services and the pensions industry
is based on requiring them to treat customers fairly—as
set out in its "Treating Customers Fairly" initiative.
We are surprised that this needs to be spelled out for them, rather
than fair treatment being a matter of course for the pensions
industry. We believe that fair treatment is a low baseline to
aim for and would expect the pensions industry to aim for high
standards of provision and outcomes for consumers. (Paragraph
103)
18. The FSA's approach
has been to focus resources wherever it perceives the biggest
risks to be at any given time. It has therefore dedicated much
of its recent resources to the banking sector, because it saw
this as a high-risk area. We find this attitude alarming because
it fails to take account of the importance of pensions regulation
at a time when careful oversight is required. We are concerned
that this risk-based approach to regulation means that the regulator
will not start focussing its attention on workplace pensions unless
or until something goes wrong. Auto-enrolment of low income people
into pension saving coupled with a risk of high-charges (including
deferred member and consultancy charges) makes workplace pension
saving an area where consumers need the highest levels of protection
and reassurance now. We are not convinced that the Financial Conduct
Authority, the successor body to the FSA for this area of pensions
regulation, is the appropriate body to regulate contract-based
pension schemes. If it remains the responsible body, then we strongly
urge it to adopt a pensions-specific regulatory strategy and to
set up a well-resourced team dedicated solely to proactively regulating
contract-based pension schemes. (Paragraph 104)
Better joint working between TPR and the FSA
19. We
welcome the work that TPR and the FSA have done in response to
the National Audit Office report on the regulation of Defined
Contribution pension schemes. However, we are concerned that weaknesses
in joint working between the two regulators persist. This includes
lack of joint risk-assessment, and discrepancies between the regulation
of trust- and contract-based pension schemes reflected in the
two different sets of principles governing DC schemes. We are
concerned that contract-based workplace pension schemes might
therefore be regulated in a less co-ordinated and rigorous way
than trust-based schemes, especially given that there are now
three regulators for contract-based schemes. (Paragraph 113)
20. We understand
the Government's reluctance to change the regulatory system for
pensions, given that the regulation of financial services more
broadly has only just been through a major reorganisation and
that both State and private pensions are in a sustained period
of major reform. However, employees who are being auto-enrolled
into workplace pension schemes must be adequately protected from
poor governance. (Paragraph 114)
21. We remain concerned
about current regulatory gaps and the potential for further gaps
to arise as a result of three regulators having a role to play.
We believe that it is necessary for a single regulatory body to
have sufficient powers to ensure that all members of workplace
pension schemes are given adequate and consistent protection.
We therefore recommend that the Government reassess the case for
establishing one body with sole responsibility for regulating
workplace pensions. (Paragraph 115)
Small pots and "pot follows member"
22. We
welcome the Government's attempts to tackle the problem of small
pension pots. However we remain concerned about the potential
for this system to result in consumer detriment for some individuals.
While we agree with the Government that people should not be auto-enrolled
into poor quality schemes, it remains the case that people may
be transferred from a scheme with low charges and good governance
into a scheme with high charges and poor governance. If the introduction
of "pot follows member" remains the Government's preference,
it must ensure, through stringent regulation, that all auto-enrolment
schemes benefit from good governance and are free from high charges,
including deferred member charges and member-borne consultancy
charges. (Paragraph 126)
Risk-sharing and Defined Ambition pension schemes
23. Risk-sharing
schemes can give their members greater certainty over retirement
benefits and can help rebalance risk between the employee and
the employer. We welcome the Government's intention to develop
plans for Defined Ambition (DA) risk-sharing schemes. The Government
should continue to explore ways to encourage employer appetite
for DA schemes and to take the necessary steps to remove legislative
and regulatory barriers to DA schemes by the time the Single-tier
State Pension is introduced and contracting-out ends in 2016.
This may provide employers with an attractive alternative to DC
that could potentially offer employees better outcomes in retirement.
(Paragraph 142)
24. We recognise
that many millions of people will be auto-enrolled into DC schemes
in the future and that joining a DA scheme may be an option for
only a small minority of employees. We therefore recommend that,
while it investigates options for DA, the Government remains focussed
on ensuring that people are being enrolled into DC schemes which
offer high standards of governance and reasonable and justifiable
charge levels. (Paragraph 143)
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