Pensions regulatory gap 'unsatisfactory', DWP report says

The persistence of the hole, despite attempts by the DWP, Financial Ombudsman Service and Pensions Ombudsman to close it, is “unsatisfactory”, the DWP said in its triennial review released last week.

The report also concluded that the DWP needed to decide whether it planned to merge the Pensions Ombudsman with the Pension Protection Fund Ombudsman.

While many industry figures agreed on the need for a review of pensions regulation, the merging of the PO and PPFO was seen as having little significance.

The report itself acknowledged this, saying: “The fact that the PO and PPFO are legally distinct is undoubtedly anomalous, but it is an anomaly almost completely devoid of practical consequences.”

The main concern surrounding the regulation of pensions schemes stems from the fact that existing regulation was designed to deal with trust-based schemes, which are declining in popularity.

The well-regulated safety of trust-based schemes is increasingly under threat as companies move into less expensive contract-based schemes, which may be riskier if regulation is not addressed.

“Unless governance of contract-based schemes comes up there is a greater risk of something going wrong, which can affect confidence” said Francois Barker, head of pensions at Eversheds.

The regulator is less equipped to deal with contract-based schemes, which are growing in popularity, said Lesley Browning, a partner at legal firm Norton Rose Fulbright.

“The regulator doesn’t have the appropriate authority to deal with them [trust-based DC schemes] and the Financial Conduct Authority doesn’t have the resources,” said Browning.

The changing landscape of the pensions industry is a major challenge to the debate. The effect that auto enrolment will have on the industry is difficult to predict.

Some industry figures believe that any discussion of regulatory reform should be postponed until after the effects of auto-enrolment can be better understood.

Victoria Leigh, partner at law firm Squire Sanders, said: “There is so much reform going on and nobody knows how it’s going to turn out. The better option is to stand back and wait for things to bed down, then do a full assessment.”

If regulation is not addressed, however, the vastly increased number of people being auto-enrolled into schemes may not have the protection they require.

This would lead to regulators having to catch up with the problems of the newly changed market and then communicating those changes to a larger audience unaccustomed with how pensions work.

“Once you have set that up then you can talk about the respective powers of the Pensions Ombudsman and the Financial Services Ombudsman,” said Darren Philp, head of policy at The People’s Pension.

The government's ambitious agenda for the pensions industry, including major reforms such as pensions consolidation and defined ambition, has pushed regulatory reform down the list of priorities, said Philp.

“Once you get those regulatory bases right you can start thinking about how to make savings for members,” he said.