Report findings and recommendations
The Report calls on the Government to reassess the case for establishing one body with sole responsibility for regulating workplace pensions. Noting concerns over current gaps in regulation and the potential for further gaps to arise as a result of now having three regulators with a role to play, the Report argues that a single regulator is necessary to ensure that all members of workplace pension schemes are adequately and consistently protected.
The Report also highlights that deferred-member charges and member-borne consultancy charges have the potential to cause serious consumer detriment. It recommends that both are banned by the Government, if significant progress is not made in the very near future by the industry towards ending them.
Commenting on the Report, Dame Anne Begg MP, Chair of the Work and Pensions Select Committee, said:
"Under auto-enrolment millions of people will be brought into pension saving for the very first time. The need for rigorous pension scheme governance has never been more vital.
It is essential that all members of workplace pension schemes are protected from poor governance, irrespective of the particular scheme they are in. We do not believe this is always the case under the current regulatory system and evidence from the regulators failed to convince us otherwise. On the contrary, we are concerned that current gaps in regulation will be exacerbated by the fact that we now have not two, but three regulators involved – The Pensions Regulator; and the new Financial Conduct Authority and Prudential Regulation Authority, set up to replace the FSA.
The Government should reassess the case for establishing one body with sole responsibility for regulating workplace pensions. This body must be invested with sufficient powers to ensure that all members of workplace pension schemes are given the level and consistency of protection they need.
The plethora of costs and charges that can be applied to pension pots are not only confusing, they can seriously impact on an individual’s retirement income. We are particularly concerned about member-borne consultancy charges and those charges applied to deferred members – people who stop contributing to their pension scheme. Neither can be justified; both should be banned.
The trend towards lower pension scheme charges is welcome. However, a good average is not sufficient and we remain concerned by the potential for consumer detriment in schemes that persist in retaining high charges. The Regulator should carry out an urgent review of these outliers and take action if it considers this necessary. The Government should also regularly review its policy on capping charges for auto-enrolment schemes and must act without hesitation if it becomes apparent that some members are at risk of detriment.
Consumers are also continuing to lose out when they buy annuities because pension providers are not doing enough to ensure people are aware that they can shop around for the best annuity rate rather than being obliged to buy an annuity from their pension provider. We believe that it should be mandatory for pension providers automatically to supply their customers with a comprehensive breakdown of all the annuity rates available to them from different providers."
The quality of communications between pension providers, employers and scheme members will play an important role in determining future outcomes from private pension saving. The Report calls on Government, regulators, and the pensions industry to work together to agree a communications format that sets out clearly the basic, essential pieces of information which pension schemes should provide to their members.
Dame Anne Begg said:
“The current poor standard of communications is a serious cause for concern and needs to be addressed. This is not a case of the more information the better. It is about providing only the information that is relevant to employers and employees, and presenting it as clearly and simply as possible, rather the current deluge of complicated documentation which pension scheme members currently receive.”
Conclusions and recommendations
The Report makes a number of other conclusions and recommendations, including:
On scheme governance
- We recommend that the Government and the regulators investigate ways of assisting all employers who offer contract-based schemes to set up governance committees to oversee their pension scheme. [paragraph 28]
On small pots and “pot follows member”
- We remain concerned about the potential for the “pot follows member” system to result in consumer detriment for some individuals which might arise if pots are transferred into schemes which are less beneficial to members. If “pot follows member” remains the Government’s preferred option for solving the problem of small pension pots, it must ensure that all auto-enrolment schemes benefit from good governance and are free from high charges. [paragraph 126]
On risk-sharing and defined ambition schemes
- The Government should continue to explore ways to encourage employer appetite for Defined Ambition risk-sharing schemes. The necessary steps should be taken to remove legislative and regulatory barriers to DA schemes by the time the Single-tier State Pension is introduced and contracting-out ends in 2016. However, the Government’s main priority should be ensuring that the millions of people being enrolled into DC schemes benefit from high standards of governance and reasonable and justifiable charge levels. [paragraph 142]