A new regulatory agenda for the pensions sector

The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) have announced a joint regulatory strategy for the pensions sector to address changes to the way people save for and take their pension. The joint strategy aims to build upon the previous joint campaign to combat the risk of savers being scammed out of their pensions and to further strengthen the working relationship between the two regulators. To this end, both authorities have identified four key issues and outlined a regulatory strategy to address each one. This article sets out the key issues identified in the joint strategy announcement, outlines the way the regulators plan to deal with each issue and considers how this will affect those who work in the pensions sector. In summary, these issues are:

Issue 1: People are struggling to maximise their pension savings, either through not making additional payments above the minimum or not being enrolled in a pension scheme at all. To address this, the regulators intend to offer further support to assist employers with complying with their Automatic Enrolment obligations and increase enforcement activity to combat non-compliance.

Issue 2: Money is not being managed in line with savers needs. To prevent this, the FCA is planning to extend its remit to cover investment consultancy and fiduciary management and both regulators are planning to intervene more regularly in the management of Defined Benefit (DB) and Defined Contribution (DC) default schemes.

Issue 3: Pensions are not being well looked after. The regulators have placed a particular emphasis on the management of data and combating cyber risks.

Issue 4: People are not being enabled to make good decisions. The main way the regulators plan to tackle this is to improve the amount and quality of information being provided to consumers to allow them to make better choices.

Key Message: Both regulators are moving towards more joined up, co-operative regulation of the pensions sector. It is possible some of the new measures that this strategy introduces will increase the burden of compliance on scheme managers and may pose challenges for smaller schemes.

Issue 1: People struggling to maximise their pension savings

Issue

Automatic Enrolment (AE) has been widely adopted and so far over nine million employees have been enrolled via AE. However, with the growth of self-employment and people working multiple jobs, many people are not captured by AE and few are setting up their own personal pensions. There are upwards of five million people employed in the gig economy in the UK, none of which currently qualify for auto-enrolment onto an occupational pension scheme. Amongst those that are captured by AE, it appears that very few are choosing to make additional payments above the minimum.

Regulatory Strategy

The regulators plan to increase access to and participation in pension schemes. They aim to do this by:

1. Continuing focus on employer compliance with AE duties. This will involve increased enforcement activity from TPR against non-compliance and greater use of data to proactively check compliance.
2. Greater support and communication with employers, scheme providers and intermediaries.
3. Joint effort to support public policy development on access and participation. This will include work by the FCA on understanding intergenerational issues and the levels of under-saving for retirement.

How will this impact the sector?

Going forward, employers and scheme administrators should expect greater scrutiny by TPR of their compliance with AE. However, the strategy update also envisages that this will go hand in hand with greater levels of support and communication from TPR and the FCA around employers’ AE obligations.

Issue 2: Money not being managed in line with savers' needs 

Issue

Funding levels for DB schemes are generally better than 3 years ago but there will be wide variations between individual funds.

Most members of DC schemes are invested in default arrangements which have come under increased scrutiny in recent years. There are additional concerns with smaller trust-based schemes where trustees may lack relevant skills or knowledge and also unsuitable investments being included in non-workplace pensions such as Self Invested Personal Pensions (SIPPs).

Regulatory Strategy

The regulators aim to ensure that pensions are well-funded and invested appropriately. They will seek to achieve this by:

1. Greater levels of TPR intervention in DB schemes including one-to-one managed supervision of an initial group of schemes.
2. Parallel supervision by TPR and the FCA on the governance and oversight of DC default funds.
3. Implementing interventions from the Retirement Outcomes Review (ROR) such as introducing investment pathways and stopping default investments into cash.
4. Potentially extending the FCA’s regulatory remit to cover investment consultancy and fiduciary management.
5. Increased focus on environmental, social and governance (ESG) factors in investment decisions including a Department of Work and Pensions (DWP) consultation on strengthening trustee duties relating to ESG factors.

How will this impact the sector?

The regulators' approach to this issue will significantly affect DC default funds, particularly those with default investments into cash which will no longer be allowed after the ROR interventions are implemented. Another significant issue here is the extension of the FCA’s remit to include investment consultancy and fiduciary management. This will potentially bring many additional firms under regulation by the FCA who will need to ensure that they meet the obligations imposed on them by what is quite a complex regulatory framework.

Additionally, greater intervention by TPR is part of a change of focus in the DB part of the market and, particularly for those directly affected, could mean quite a different relationship between scheme managers and TPR going forward.

Issue 3: Pensions not being well looked after

Issue

Whilst there are often very good standards of governance in the occupational sector, there are challenges for smaller schemes where specialist skills, knowledge and resources may be less readily available. These smaller funds may also have significant problems with data management.

Regulatory Strategy

The regulators aim to ensure that pensions are well governed, well run and deliver value for money. They will seek to achieve this by:

1. Using a broader range of regulatory interventions to address poor governance and administration including authorisation and supervision of master trusts and proactive regulation of public service schemes by the TPR.
2. Increased regulatory interventions to promote data quality and security including commissioning academic research on cyber risks and resilience.
3. Using a broader range of regulatory interventions to drive value for money.

How will this impact the sector?

From 1 October 2018, master trust pension schemes have 6 months to apply for authorisation from TPR in order to continue operating. To do this they will need to demonstrate that the fund is well governed including evidence that those in charge of running the scheme are fit and proper to do so, there is a continuity strategy and the IT systems and processes are suitable. The expected consolidation of the market is already occurring: TPR’s latest report states that 36 of the 90 existing master trusts have determined to exit the market. The increased expectations on small schemes through TPR’s 21st Century Trusteeship programme may be a challenge for many small schemes and the new development of consolidator DB schemes may provide a solution for some. 

Issue 4: People not being enabled to make good decisions 

Issue

The decision making of individuals when it comes to their own pensions is often poor. This is due to several factors including low levels of financial literacy and the complexity of pension products and tax rules. A YouGov survey carried out for our Perspectives on Financial Services: Pensions report revealed that 67 per cent of respondents do not understand the products available in which it is possible to invest a pension and 45 per cent said they found it difficult to access good advice about pensions.

Regulatory Strategy

The regulators objective is that people access helpful information, guidance and advice that enables them to make well-informed decisions about their pensions and retirement plans. They will seek to achieve this by:

1. Cross agency collaboration on work to improve consumers’ understanding, engagement and trust in pensions.
2. Continued promotion of high quality and accessible information and guidance including implementing the ROR proposals to improve the quality of information given before, at and during retirement.
3. Continued regulatory focus to promote the provision of sound and accessible advice including implementing proposals to introduce a public directory of those working in financial services.
4. A specific focus on improving outcomes from DB transfers.
5. Strengthened multi-agency collaboration on combating pension scams.

How will this impact the sector?

Engagement by the regulators with this issue reflects a greater focus on the quality of advice that is being given to members of pension schemes, particularly those investing in personal pension schemes or those transferring out of a DB scheme which could have significant consequences for that person's retirement. All firms, particularly those offering advice, should be aware of this issue and ensure that all advice or services given are appropriate for the level of sophistication of the client.

Overall message 

It will be interesting to see how and when the proposals set out in this joint strategy announcement will be implemented. However, the key messages are that both regulators are moving towards more joined up, cooperative regulation of the pensions sector and focusing their regulatory interventions on the issues outlined above. With this in mind, these issues and the objectives set by TPR and the FCA form a useful road map for firms operating in this sector to ensure that they are compliant with their regulatory obligations.