Work and Pensions Select Committee calls for better regulation in auto-enrolment
by Dr. Ros Altmann
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Under strict embargo until 00.01 on Thursday 25 April 2013
Government must act now to ensure better protections for workers’ pensions
Current system disjointed with workers falling through Regulatory cracks
Failure of regulation could derail whole purpose of auto-enrolment
Workers being let down by failures of regulation as auto enrolment starts: The Report just released by the Work and Pensions Parliamentary Select Committee highlights, yet again, how many workers are being let down by the pensions industry. Even as auto-enrolment is bringing millions more employees into company pensions, the Regulatory system is not yet up to its task.
Trust based regulated by tPR, contract based by FCA: There are two principal types of workplace Defined Contribution pension arrangements which qualify for auto-enrolment – trust based and contract based. Trust based schemes are overseen by trustees who are supposed to act in the best interests of members and regulated by the Pensions Regulator. Contract based schemes are offered by private companies on an individual basis, with no trustee looking after member interests, and are regulated by the new FCA (Financial Conduct Authority, which has just taken over from the FSA).
There are several areas of major concern, which need to be urgently addressed to help members achieve better outcomes from their pension savings, and protect them from unfair and inappropriate charges:
- Consultancy Charging should be banned: At the moment, it is perfectly permissible for unqualified, unregulated advisers to charge auto-enrolled workers for advice that is only given to the employer. Anyone giving advice to the workers themselves would need to be fully qualified and regulated, but because the advice is going to the employer, the Regulatory protections are not being applied. That is despite the fact that the workers’ pension fund is paying for the advice that the employer receives. This is clearly wrong and should be banned immediately.
- Active Member Discounts are not understood: Currently, pension providers are allowed to levy higher charges on workers who are no longer contributing to their pension fund because they have moved employers. These higher charges are levied, despite the fact that the work involved in administering their pension funds is less than for active members.
- FCA and tPR rules leave governance gaps and inconsistencies: The Work and Pensions Committee rightly points out that the FCA regulation of contract based workplace pensions merely require adherence to the ‘Treating Customers Fairly – TCF’ rules, which are a very low standard. They do not offer proper protection and the responsibilities entailed are unclear. Indeed, the rules governing sale of these pensions are different from the Pension Regulators guidance to trustees. Both Regulators require different standards, but neither of them offer consistent protection for scheme members and the governance gaps are allowing member protection to be jeopardised.
- Need one single, consistent Regulatory system for pensions: Workplace pensions are increasingly moving to defined contribution and employees are largely unprepared for the implications that taking on investment and decumulation risk entails. Most employees will just trust that their employer or trustees are looking after their interests when setting up and enrolling them into a pension scheme. however, issues like consultancy charging and active member discounts, as well as variability in charging structures without standard rules, can leave members at risk of being in poor value schemes, or facing unfair charges which offer them poor value.
- Communications: There is also no standard requirements for member communications. The Work and Pensions Committee rightly points out that there is no consistency in standards of communications. Employers should be required to explain their pension scheme to their workforce, which can be with standard materials from whichever provider they choose, or from an adviser that they use. But the explanation needs to be in words that the employees can understand, explaining the investment options, default funds and absolute clarity on charges. At the moment, employers do not have any vested interest in ensuring the scheme they offer their workers is low cost and good value, since the member pays the charges. A requirement on employers to check that they have considered the charging structure and that it offers good value relative to other schemes should be imposed by regulators.
- Annuities purchase is not being adequately regulated in members’ interest: A final area in which Regulators are letting members down is at the point of decumulation. The FCA does not ensure that members of contract based pension schemes receive proper advice before they convert their pension funds into an annuity or other income stream, or indeed decide not to do so. At the moment, workers are being encouraged just to ‘shop around’ if they are encouraged to do anything at all, but this is not enough. At retirement, they need advice before committing to an irreversible annuity. If they buy the wrong kind of annuity, especially at today’s record low rates, they will be locking into something that they can never change. Even if they ‘shop around’ and get a good rate, they may buy the wrong product. They need to consider covering a partner, allowing for ill health, different guarantee periods and so on. The current system allows workers to be charged a significant fee (could even be 3.5% of their fund) just to buy a product from a website, without actual individual advice. Given the asymmetry of information, this leaves them at risk of failing to optimise their pension income. The Pensions Regulator has also failed to require trustees to ensure their members are doing the best thing for themselves at retirement. Trustees seem to believe that just offering members a ‘shopping around’ direct sell service is sufficient. It is not. The Regulators need to wake up to the protections that members need and require trustees to protect the members on decumulation.
In conclusion, there is a long way to go before workers can be assured that auto-enrolment will work in their interests, rather than in the interests of the pension providers. The current patchwork of regulations is not working well and as the Government forces millions of workers into workplace pension schemes, surely it has a duty to ensure there are proper protections in place. It makes little sense to have two different regulators, with different rules, neither of which is providing sufficient safeguards. The FCA is not set up to specialise in pensions, but pension saving and decumulation are specialist areas, with specific rules and inflexibilities that require detailed regulatory protection. We must not let these unsuspecting workers down. It is already obvious that issues such as consultancy charging and lack of fee transparency, as well as failure to ensure adequate member communications and protections in retirement, have the potential to derail the trust that auto-enrolment has so far built up.