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OPDU Report 26 October 2009 Bulletin Board The events of the past 12 months have brought pensions to the attention of millions of people who may never before have given them a second thought. Defined benefit (DB) pensions in particular have made headlines, with reduced asset values and increased deficits. The downturn has inevitably been a challenging time for trustees and for sponsoring employers, but consumers have also felt the impact, with many defined contribution (DC) scheme members finding that their savings are worth less than they hoped. For many years we have been seeing a trend from DB to DC provision. There are already almost 2.5 million members in over 54,000 occupational DC schemes in the UK. An additional 3.2 million employees have entered personal pension arrangements negotiated by their employers, in the form of group stakeholder pensions, GPPs or Group SIPPs. The 2012 reforms are designed to get millions more people saving, many into DC – whether through the personal accounts scheme, or another qualifying arrangement. For the UK workforce, DC pensions are increasingly the vehicle that will determine their retirement income. There are still however millions of people in DB schemes – with around 1.5 million active members and another 8 million deferred – and our duty remains to protect the benefits of all scheme members. So our commitment to supporting those running and managing DB schemes remains as strong as ever. But the landscape is continually evolving and our approach is changing to reflect that fact. The DC risks Members of DC schemes bear a greater personal responsibility for the size and shape of their retirement income. Generally low levels of financial knowledge have impacted savings behaviours across the market including attitudes to pensions. This is why it is so important for the Regulator to play its part in helping members to understand their options and also to encourage them to think about their income in retirement. In order to help members of DC schemes to make informed decisions we are focusing even more effort on empowering and enabling DC trustees, advisors and employers to play their part in that process too. We already provide support for trustees and employers of DC schemes, including guidance and codes of practice, on issues like member communications and employer engagement. But in July this year we renewed our focus on DC, aiming to improve standards in administration and governance, and to increase employer engagement. Improving DC administration and governance High standards of administration and governance are critical across all schemes, DB and DC, contract-based and trust-based, but are particularly important in DC where the value the member gets is influenced by the choices they make about contributions, investments and type of retirement income. In the current financial situation these choices are even more important as many members are facing the tough reality that their savings may not be worth as much as they hoped. As a result we are currently putting significant effort into improving administration and governance of DC schemes, especially in light of the 2012 reforms. Record-keeping Accurate record keeping is one critical factor in DC pensions and our guidance, published in January, signals our increasing focus on comprehensive, clean and accurate data. We have committed to reviewing this guidance at the end of the year and that process will start shortly. There have already been some encouraging signs. A recent Capita Hartshead Pensions Administration survey found that almost 50 per cent of schemes were planning to carry out a formal data cleansing exercise, and our 2009 governance survey – which will be published in November - shows that 45 per cent of schemes have carried out data analysis of member records. Whilst these are encouraging signs, the importance of record-keeping in 2012 and beyond means that we feel it is important now to put an even greater focus on getting data up to scratch. Pre-retirement processes Pre-retirement processes are another important area of scheme governance, as the decisions made at this time can significantly impact the value a member gets from their pension savings. In trust-based schemes trustees are primarily responsible for ensuring that members get the information they need before retirement. In contract-based schemes however, the onus is on the provider. We do recognise that there is already a lot of good practice by trustees and providers but there is still room for improvement. Our 2009 governance survey shows that only a third of trust-based schemes have reviewed their retirement processes in the last year, and that a third have not carried out a review for over three years. Unacceptably it also found that some schemes have never looked at their retirement processes. We are currently reviewing the standards of retirement literature in DC schemes and will be publishing a report in late October. The study will look at a sample of 100 trust-based DC schemes and we will consider both adherence to legislation and the use of clear, simple language. To help in improving the standard of pre-retirement literature, we recently published updated information for members which sets out the options they have – like choosing the option market option, or deferring purchasing an annuity, or income drawdown. This can either be given directly to members in the six months before they retire, or can be used a guide to best practice. This has already been downloaded over 30 thousand times by trustees and advisors. There is also more information for trustees on the Trustee toolkit which covers all the TKU requirements. DC trustees have an individual path through the Toolkit which highlights the areas which are most important for them. The employer’s role in better governance Whilst much focus is placed on the role of trustees in ensuring good governance and administration practices, in DC contract-based schemes, where there are no trustees, employers can help to ensure that a scheme is well governed. There are no set rules on how or whether an employer takes on this role but members can benefit from the scheme being reviewed regularly and there are a number of ways employers can have a positive impact. Our employer guidance gives examples of actions employers can voluntarily take, at little or no cost, including management committees, reviews by human resources, and reviews by an IFA. The value of greater employer engagement Employers can play a vital role not only in governance but throughout the whole process of pension provision. Engaged employers can boost take up of workplace pensions and can also help employees to make the not of the pensions on offer by providing information and support. As awareness of pensions increases, so we can expect that many employees will turn to their employer for information. However, we know that many employers do not feel confident talking about pensions, especially as they are aware of breaching rules on giving financial advice. So to help them we have published a leaflet that offers answers to some of the most common questions such as: Why should I bother providing information to my employees about pensions; What can I tell my employees about my pension scheme; What can I tell my employees if they ask me if it is a good idea to join the pension scheme; and What could I be doing when employees approach their retirement dates? The role of employer engagement in 2012 The relationship between employers and pensions will change again in 2012. Those who do not already provide a pension scheme will have to enrol their employees into a qualifying scheme and those who do offer a pension will need to make sure that it qualifies as a suitable arrangement, and if not, make the necessary changes. Our aim in regulating the auto-enrolment process will be to make it as easy as possible for employers to comply with their new duties and to minimise the regulatory burden of the new system. More details of the new employer duties and Personal Accounts will be available early next year. An ongoing commitment As we enjoy the benefits of living longer, healthier lives, and as the structure of working life and retire-ment changes, the nature of the pension landscape will continue to evolve too. More people will have to give greater thought to how they will support themselves in retirement and employers will increasingly find that they need to understand and engage with the pensions choices they offer. The Pensions Regulator remains fully committed to supporting and enabling employers to meet this challenge and to continue evolving our approach as the landscape changes. To view our updated information for DC employers, advisors and trustees visit www.thepensionsregulator.gov.uk/responsible/index.aspx
Tony Hobman |
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