Between auto-enrolment and supporting pension funds buffeted by markets in turmoil, The Pensions Regulator is set to play a key role in the industry this year. Matt Ritchie looks at how the organisation is aiming to tackle the challenges

This trend, underway for some years, will only gain momentum as more and more employers are covered by auto-enrolment legislation, which is expected to result in millions more people saving into DC schemes.

Last year saw the regulator move toward paying greater attention to DC, initiating a dialogue with the industry on good member outcomes from workplace pension provision.

TPR identified and published six principles it considered key to enabling members to achieve good outcomes from DC pensions. They were; appropriate contribution decisions, appropriate investment decisions, effective administration, protection of assets, value for money, and appropriate decumulation decisions.

In its response to the submissions received on the principles, the regulator said there was “strong consensus” among the 60 respondents that the key elements had been correctly identified.

DCisions business development director Nigel Aston says the increased attention on DC was welcome, in particular the focus on member outcomes.

“I think everything should be designed to lead to good member outcomes. The work on governance, the work in the past from the IGG on investment; all of those things should really have one critical and perhaps singular aim in mind, and that is to give more adequate pensions to people in retirement. That sounds obvious, but the industry doesn’t seem to focus on that nearly enough and, at the moment, it doesn’t measure those outcomes particularly well.”

TPR chief executive Bill Galvin says that the regulator will use the six principles as a starting point before embarking on a round of discussions with industry. TPR will be looking to work with practitioners and representative groups to get a “shared understanding” of the principles and the detail that sits underneath them.

“We plan to develop information that will help employers that are selecting a scheme to understand the key features of a good DC scheme. We will work with the industry to enable them to demonstrate their ability to provide these features - to employers and members where the demand side is engaged, and to regulators where it is not,” Galvin says.

Details of the approach to regulating DC schemes will be released in the coming weeks.

JLT Benefit Solutions chief executive Duncan Howorth says that the DC principles paper was a highlight of last year in terms of the regulator’s activities, and it was “absolutely right” of TPR to recognise that DC will be the predominant vehicle for retirement savings as time goes on.

However, Howorth is concerned about the way regulation could develop, and says it is important that the regulator’s approach allows the industry to find effective solutions.

“I worry that they’ve already made their mind up what a future DC landscape looks like and will try to regulate toward that. I worry about the focus purely on charges; that they talk about member outcomes but constantly refer to charges. As a regulator they have to stick with providing a framework and allow advisers to advise and clients to choose.”

The focus on charges is also an issue raised by Aston. While fees will be “central” to any objective comparison of schemes, Aston says cost is only half of the equation. Indeed, DCisions’ research indicates the funds that have performed best throughout the troubled markets of the last couple of years have often been the most expensive.

“People focus on fees because they are easy to compare and measure, but what we should want to look at is the net risk-adjusted return that each individual member is receiving – the value that they are getting.”

TPR has the statutory obligation to ensure employers are compliant with auto-enrolment requirements, and with the first companies now less than nine months out from entering the new regime this work will quite understandably form a large part of the regulator’s activities for 2012.

Much of the recent dialogue about auto-enrolment has been in relation to the delays to the introduction of smaller firms into the regime, but Galvin says the government is committed to the new system and employers should not relax their preparations.

“For the regulator things have been ‘business as usual’ and the staging adjustments have not significantly impacted the work we’re doing.
“We are providing information and guidance to employers, industry bodies, advisers, payroll software providers and others - alongside ongoing work to develop and refine the targeted communications approach that we will need to reach different business sectors and employers of different sizes. Given the change of plan, we will be working hard to ensure the messages around staging dates are loud and clear.”

TPR is currently working hard to make sure the new duties are introduced in as straightforward a manner as possible for those employers set to start auto-enrolling staff this year.

“Our focus with these employers is to ensure the issues are understood and properly implemented, and any systemic issues are resolved. So we are working very closely with payroll software and pension providers to ensure issues are raised and addressed in good time.”

Work is also well underway on raising awareness of auto-enrolment among medium, small, and micro employers.

Awareness is an area where Howorth feels TPR may face challenges going forward. Many employers will have cause for dealing with the regulator for the first time over the next few years as auto-enrolment is rolled out, and it will be important for the organisation to raise its profile.

“The regulator has a very low profile in the corporate world. It might be known to trustees but it isn’t really known to companies unless it has had cause to ruffle feathers. It certainly isn’t known to companies that don’t run pension funds. The whole issue about who the regulator is and what it stands for will need some managing,” Howorth says.

Defined benefit
Despite the increasing focus on money purchase, the regulator still has a lot of work to do in the defined benefit space. This is particularly true given the volatility throughout the market, with the impact this has on both scheme funding and sponsors’ balance sheets.

An important part of the regulator’s work involves reviewing employers’ ‘recovery plans’, which must be completed and submitted to TPR by all DB schemes in deficit at the time of their triennial valuations. Plans lay out how and over what timeframe an underfunded scheme will make up its deficit.

Howorth says the latest cycle of valuations and funding plans will paint a ‘bleak picture’, which will call upon the regulator to provide a degree of flexibility.
Quite how the regulator will ease the burden is unclear for now, but it is set to publish a statement in April aimed at assisting schemes going through the valuation process. It will be the first of what will become an annual statement, and set out the regulator’s expectations of trustees.

“We’re working on the detail of this, but it will be designed to help trustees understand the approach we believe they should take in light of prevailing economic conditions. As an annual statement it’ll be tailored to reflect the conditions of the time, giving trustees in each valuation cycle an idea of our expectations and an opportunity to reflect on trends they are observing in key assumptions,” Galvin says.

TPR is working “closely” with several schemes that need to move early with their recovery plans, and engaging with the advisory community to ensure the guidance will be as helpful as possible.

However, Galvin says it is clear market conditions will require trustees to question the robustness of their funding arrangements, and have very clear views on the strength of their contingent recourse to additional support.

Written by Matt Ritchie

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