As more people start saving for a pension, we need the right protection model to cover all forms of DC saving, says Duncan Howorth, ITM
DC protection for all
In a nutshell:
- DC schemes must be fit for purpose and this is the primary reason that the Pensions Regulator is focusing efforts on effective governance and strong member outcomes
- the focus at present is on mitigating the risk of a failed master trust – in particular, ensuring that an orderly wind up can take place with financial resources separate from member pots
- however, we need the right protection model in place, not just for master trusts, but for all DC savings.
By the end of 2018, around 10 million people will be saving for a pension, the vast majority through a defined contribution (DC) scheme. The DC universe comprises some 2,000 DC only schemes, with a further 1,000 schemes providing DC benefits through a DC section or some hybrid form. These must be fit for purpose and this is the primary reason that the Pensions Regulator is focusing efforts on effective governance and strong member outcomes.
A recent survey of the DC market focused on governance and led to the Regulator issuing a new code for DC schemes. It showed considerable progress in the governance of DC schemes. For example, 52% now have professional or corporate trustees. Together with a tougher regulatory code, caps on charges and the Regulator being prepared to act and use powers to fine non-compliance, further progress will no doubt be made.
The other material source of DC savings is the group personal pension market. This is regulated by the Financial Conduct Authority (FCA), supported by independent governance committees (which will also have the responsibility for monitoring outcomes for the many small trust based DC schemes within life insurers).
The Regulator has drawn a number of conclusions from the information gathered and has also started to bear its teeth, meting out fines for lack of compliance with its requirements.
There has also been heightened focus and commentary on the role of master trusts and the risk that any failure would have on members’ pension savings.
This all appears to be leading to (or is intended to lead to) a smaller DC universe of larger schemes. It raises the question of whether or not this is the right answer for workplace pensions.
Employers should still feel they have a choice to operate the type of scheme that suits them. Running a smaller, individual trust based scheme should not, for example, be automatically deemed to be inferior.
Selecting the right workplace pension is not as straightforward as some would have you believe. It requires an analysis of the workforce and an understanding of the employer’s objectives, resources and needs, for example, in their ability to design a scheme and add features unique to them. Most employers choosing this route have every incentive to govern the scheme well.
The focus at present is on mitigating the risk of a failed master trust – in particular, ensuring that an orderly wind up can take place with financial resources separate from member pots. But what about protection for members of individual trust based DC schemes? These schemes – 10% of the universe is currently in wind up, with a further 42% paid up or closed – go through an extended and expensive wind up process. These costs are met by the employer as a result of a change in the manner of pension provision. However, where the wind up is a result of employer insolvency, the only resources to meet wind up costs are the member pots.
Action is needed to ensure that savings trapped in these schemes are safe, are working for the member and are subject to proper oversight. If legislation is needed to protect DC savings on wind up in trust based pensions, then the playing field should be level. Perhaps there is even a role for master trusts to assume responsibility for paid up or closed DC schemes through some form of consolidation.
Let us get the right protection model in place, not just for master trusts, but for all DC savings.
As seen in Pensions World magazine: https://www.pensionsworld.co.uk/article/dc-protection-all