Out-Law News 3 min. read
13 Jul 2012, 9:54 am
In a new report (51-page / 704KB PDF), the National Audit Office (NAO) said that the four agencies responsible for overseeing certain pension schemes - The Pensions Regulator, Financial Services Authority (FSA) and Government departments the Department for Work and Pensions (DWP) and the Treasury - needed to develop a "more integrated" approach to risk assessment, as well as collecting evidence on the number of members of schemes and the range of charges and fees that apply. The Pensions Regulator regulates all work-based pension schemes, but shares responsibility for so-called 'contract-based' schemes with the FSA.
"It is not possible to judge how well The Pensions Regulator is doing to protect the benefits of members of work-based pension schemes," Amyas Morse, head of the NAO, said. "This is all the more significant as the trend towards membership of such schemes accelerates. While the Regulator's overall approach is sound, its performance measurement system is not strong enough."
Defined contribution pension schemes do not guarantee what members will get when they retire. Contributions to the scheme are invested in an agreed way, and the employee can then buy a pension with whatever funds are available on retirement. Unlike traditional defined benefit pension schemes, which promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment, it is the employee who bears the full risk of a defined contribution pension losing value or not performing as well as expected.
Such schemes are becoming more popular as employers struggle to cope with increasing life expectancy and poor investment results. According to a recent report by industry body the National Association of Pension Funds (NAPF) one quarter of defined benefit schemes are now closed to future contributions while Royal Dutch Shell, which operated the last defined benefit pension scheme based on final salary among the FTSE 100 largest companies by share capital, closed the scheme to new members earlier this year.
There are approximately 3.4 million active members of defined contribution pension schemes in the UK, according to NAO figures. The DWP expects between five and eight million additional members by 2018 as a result of its automatic enrolment reforms, under which companies will have to enrol all eligible jobholders into a suitable work-based pension scheme. A phased roll-out of the programme, starting with the largest companies, begins in October.
This trend towards defined contribution pension provision increases the longer-term risks to the taxpayer of an aging population, the NAO warned, as members are on average likely to achieve considerably lower levels of retirement income than those with predominantly defined benefit pensions. The state is ultimately liable for providing a basic income for the elderly, the report said.
Pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said that the NAO's conclusions followed concerns raised by The Pensions Regulator itself last year. In a statement in October, the Regulator highlighted findings of poor governance standards among many trust-based defined contribution pension schemes, she said.
"The NAO's conclusions are concerning in the light of the trend towards DC benefits and the Regulator's statutory objective to protect member benefits," she said. "However, identifying and addressing the threats to member benefits is more tricky in a DC environment than in a DB context – not only is there the problem that a number of different bodies are responsible for DC schemes, there is also the problem of identifying exactly what member outcomes are acceptable, given that member benefits will depend on a variety of factors including management charges, fund selection, investment performance and annuity rates."
In its report the NAO said that although the Pensions Regulator had achieved some improvements in its administration of defined contribution schemes, its current system of performance measurement remained ineffective. In addition its research showed that the different fees and charges applicable to schemes resulted in some cases in an estimated 17% difference in the size of the final pension pot for members contributing the same amount, and whose contributions performed similarly on the stock market.
In a published response to the report Bill Galvin, chief executive of the Regulator, said it had set itself the "goal" of developing performance measures linked more directly to actual economic outcomes for scheme members as part of its current economic plan.
"Standards in DC schemes are hugely important to us – our principles and features for workplace DC schemes are helping to set the agenda for good automatic enrolment schemes," he said. "We believe that focusing on these principles and features will make good outcomes for members more likely over the long-term."
