Regulatory gaps in pension governance

CEO of NOW: Pensions Morten Nilsson

CEO of NOW: Pensions Morten Nilsson

“The objective of protecting member benefits rests with the Pensions Regulator (“tPR”), but it is unclear how this aligns with the roles and responsibilities of all bodies across the regulatory system,” the NAO report stated . It noted that key elements of regulation of DC pensions were outside the specific remit of tPR and that these were largely overseen by the Financial Services Authority.

It also stresses the need for effective governance arrangements across the industry and says it is currently unable to assess whether tPR has sufficient powers to perform its duties. There is an inconsistency in the governance of the various DC pensions that needs to be addressed. For example, contract-based schemes that individuals have with insurance companies have less oversight than trust-based schemes which are overseen by trustees, who have a statutory responsibility to look after members’ interests. There is also a distinct lack of barriers to entry into the trust-based arena where virtually anyone can set up a trust-based scheme. In comparison, there are rather large capital requirements to set up an insurance company which provide contract-based pensions.

“There is no common framework for assessing risk, collecting evidence and measuring performance across the different bodies involved, and no single body has overarching responsibility for the delivery of regulatory objectives.” The NAO has criticised what it perceives as a lack of accountability in UK DC regulation when it comes to fees and annuity purchases. There is also a lack of investment governance of the 200,000 DC schemes in the UK private sector, of which only 10,000 have more than 100 members and tPR’s latest governance guidance for auto-enrolment does not fully address the continued use of outdated DC default funds used by thousands of small and medium-sized employers in the UK.

The prospect of a single regulator will certainly be a hot topic since the publication of the NAO report and although action is certainly required to bridge the gap, is it too simplistic to merge the two and could this have a detrimental effect such as a loss of focus on governance?

Please share your thoughts…

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