Improving governance and best practice in workplace pensions - Work and Pensions Committee Contents

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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Prepared 25 April 2013