Why too many DC regulators spoil the broth

The Pensions Regulator has jurisdiction over trust-based schemes but the Financial Conduct Authority has jurisdiction over contract-based schemes such as group personal pensions.

At a consumer level, the existence of two regulators is confusing

Let us imagine a bizarre situation: a competitive market for pension regulation. The one rule is that, like buying fuel for a car, you must have one or the other.

The regulator offers its version of regulation for £10,000 and the FCA its for £9,000. There are no other factors to influence your decision.

You would, of course, opt for the FCA. However, if the two reversed their prices you’d go for the regulator. It is human nature and sensible to choose the deal that suits you best.

The reality is we do not live in a competitive market for pension regulation, in price, quantity or quality.

However, we do live in a world where there is a choice of regulation and because of that, there will be selection.

Consumers – employers and their advisers – will do what is natural and sensible, they will pick the system that suits them best. This is described as regulatory arbitrage.

The case in favour

In its April 2013 report, the Work and Pensions Select Committee called for one regulator. It cited a number of arguments advanced by different industry groups:

• The potential for two regulators to apply different standards or to duplicate work, resulting in the system not working properly;

• The potential for a ‘regulatory gap’ and so the risk of unfairness and lack of clarity.

• Discrepancies that exist between the current two frameworks.

It pointed to a 2012 report from the National Audit Office that highlighted that first, there is no one party that is leading and is accountable for the delivery of a proper framework for defined contribution outcomes. And second, although the Financial Services Authority – the FCA’s predecessor – and the regulator worked together on the matter, there is no overarching objective and no common framework for making evidence-based risk decisions.

In addition, the report cited arguments that there were material weaknesses in the current system resulting in the under-regulation of group personal pensions.

The committee concluded: “We believe that it is necessary for a single regulatory body to have sufficient powers to ensure that all members of workplace pension schemes are given adequate and consistent protection.” 

The National Association of Pension Funds, the representative voice of work-based pension schemes, supports the argument. 

Its members – employers, pension schemes and industry practitioners – all bear the scars of a dual system.

The response

The essence of the government’s response, published in June, was ‘not now’. They argued there is much else going on in the pensions world, that the structure of regulation had only recently changed – with the splitting-up of the FSA – and that all of the parties are currently working harder to work more closely.

While it is possible to sympathise with these arguments, it is telling that the response did not rule out a change – merely its timing.

It may be too much to suggest this implies the government agrees with the argument, but it does clearly imply their doubt in the ability of the two regulators together to produce a sound regulatory framework.

At a consumer level, the existence of two regulators is confusing. Employers rarely understand the differences and employees even less so.

This is inefficient. Whose rules are we supposed to comply with? Who are we supposed to report to? Where do we go to complain?

Also, there is evidence that some employers are blinded by the light of dual regulation. Unable to determine which applies to them they either ignore both or try to comply with both. Neither are good outcomes.

Auto-enrolment is now in full swing. Come 2017, around 20m people will be in a workplace DC pension scheme.

It is a bit late to be merging the regulatory system but perhaps we should work towards it with some urgency before everyone buys the version that suits them best instead of the version that delivers the best member outcomes.

Richard Butcher is managing director at professional trustee company PTL