In July, The Pensions Regulator set out what it sees as the next steps towards improving standards and outcomes in defined contribution (DC) schemes. This included a revised code of practice to help trustees to meet the legislative requirements for running occupational trust-based DC schemes.
However, a quarter of pension fund trustees believe their scheme fails to comply with the new code, according to research by law firm Sackers. It found that only half of respondents’ pension schemes are seen as fully compliant with the code.
The National Association of Pension Funds (NAPF) also has concerns about the code, even where it is being implemented. “The big weakness of this code is that it excludes contract-based pension schemes, meaning around three million savers will be overlooked by this effort,” says Alizeh Hussain, NAPF policy adviser on strategy.
In September, following a survey of DC workplace pensions, the Office of Fair Trading (OFT) found that “competition alone cannot be relied upon to drive value for money for all savers in the DC workplace pension market”. This is because of the complexity of the product and the fact that employers often lack the capability or the incentive to assess value for money.
The OFT found that these weaknesses have already created a risk of savers losing out in parts of the market. It has since reached agreement with the regulator on a set of reforms, but experts remain concerned about the level of knowledge among employers.
Currently, there are three main workplace pension models. Trust-based schemes are managed by a trust appointed by the employer while, with contract-based schemes, the employer appoints an external provider. A master trust is a single trust that services a number of employers.
“The main advantage that trust-based schemes have over contract-based schemes is that trustees have a fiduciary duty to the members,” says Roger Mattingly of the Society of Pension Consultants. “This duty of loyalty does not currently exist even where there is a governance structure in place for contract-based schemes.”
“Master trusts offer professional trusteeship and governance at a relatively low cost, and in our view are a good alternative to other types of plan for some of our clients,” says Jan Burke, partner and head of DC consulting at Aon Hewitt. “Master trusts have evolved in recent years so that the roles of the parties involved have become clearer and conflicts of interest are being well managed in the majority of arrangements. Practices will develop further as a result of the recent consultations being put forward by The Pensions Regulator and the Institute of Chartered Accountants in England and Wales.”
Although a more comprehensive, accessible regulatory regime is developing around DC pensions and auto-enrolment, it is small companies who are under most pressure
Phil Farrell, principal consultant at Quantum Advisory, an actuarial and benefits consultancy, offers a word of warning. “Employers should be cognisant of the potential for a conflict of interest between the master trust’s trustee and the provider of the master trust,” he says. “In our experience the number-one driver for employers or trustees changing from one provider to another is a poor quality administration service.”
Although a more comprehensive, accessible regulatory regime is developing around DC pensions and auto-enrolment, it is small companies who are under most pressure. “Small businesses are not pensions experts,” according to the Federation of Small Businesses.
“Selecting a good qualifying scheme will be very challenging for small firms because they lack pensions knowledge; their primary concern will be to ensure they comply with their auto-enrolment duties and it is practically impossible to compare the qualifying auto-enrolment schemes that are currently on the market. Our independent legal advice line provides FSB members with information pertaining to employment law, including what is required of employers under auto-enrolment to comply with the law.”
Morten Nilsson, chief executive of NOW: Pensions, says: “One of the unintended consequences of the combination of auto-enrolment and the retail distribution review is an advice gap in the smaller employer market. While the newer schemes designed for auto-enrolment generally represent good value, tens of thousands of employees are currently trapped in the funds of older schemes with high and disguised charges. We would like to see schemes used for auto-enrolment ‘licensed’ to ensure employers select a scheme that is fit for purpose.”
With the introduction of auto-enrolment there is a growing responsibility on organisations of all sizes to be more aware of not just the letter, but also the spirit of the law. Experts agree that they need either to educate themselves or buy in better expert knowledge of the regulations.
“The provision of a good quality pension scheme has for too long been seen as a box-ticking exercise,” says Quantum Advisory’s Mr Farrell. “The appointment of a reputable pension adviser can deliver real value to employers and employees, averting bad decision-making, based upon false economies, and ensuring that they abide by changing regulations.”
