Analysis: Defined contribution schemes are regulated by two separate bodies, each of which works better in certain scenarios, a Pensions Policy Institute report has found. But the debate continues on whether a single watchdog would improve the current regime.
In its report, ‘Comparison of the regulatory frameworks for DC pensions’, published on Thursday, the Pensions Policy Institute looked at the differences between the Financial Conduct Authority, which regulates contract-based schemes, and the Pensions Regulator, which oversees trust-based ones.
Its analysis suggested the regulator is more compatible with workplace pensions than the FCA and places a lower cost burden on schemes, while the FCA is more prescriptive and focused on “preventing adverse events”.
It said: “There is an obvious trade-off between rigour on the one hand and cost and flexibility on the other."
Tim Smith, senior associate at law firm Eversheds, said that while the two regulators had been trying to align themselves in recent years, they could learn from each other in areas such as employer communication.
It’s a bit like a petrol car and a diesel car. They’re both cars
John Reeve, Premier
“[The regulator] is good at engaging with employers and does that, but I’m not sure the FCA particularly does,” he said.
“They definitely need to work very closely together and they need to continuously be sharing best practice… so that as far as members are concerned they get the same level of protection, regardless of which system they’re in.”
One regulator...
Richard Butcher, managing director at independent trustee company PTL, said there needs to be a single regulator.
“At the moment it’s not regulated in a consistent manner,” he said. “The FCA is a much more interventionist regulator than [the Pensions Regulator], and as a consequence you end up with two very different standards of governance for the population.”
Butcher said the way around this would have to be the introduction of a single regulator.
“I’ve argued for a length of time that there should be one regulator for all. It’s just a slightly delicate argument… almost sort of better the devil you know,” he said.
However at last week’s NAPF Annual Conference, the regulator's chief executive Lesley Titcomb said that a merger of the two organisations would not automatically improve the situation.
“People would be deluding themselves if they felt that crashing the two regulators together structurally would solve the problem. You’d still be operating under different law… and different regulatory toolkits,” she said.
Sean Browes, trustee representative at independent trustee company Dalriada Trustees, agreed it would be difficult to bring the two regimes under one regulator.
“Having said that, there are most definitely aspects of both regimes that would be common,” such as the 'fit and proper' person test, competency and appropriate governance, he said.
... for workplace pensions
The PPI report found that the main divider between pension scheme providers was their motivation, which could justify having two regulators.
It said the FCA was more suited where the provider has a profit motive, whereas the Pensions Regulator would be better able to look after trust-based schemes that are not profit-oriented.
John Reeve, senior consultant at administration provider Premier, did not agree with this conclusion.
“I think that’s a bit disingenuous to the regulator and what the regulator is trying to do,” he said.
Workplace pensions and group personal pension plans should be regulated by the same entity, according to Reeve.
“The idea that you should be regulated by a different organisation depending on which of these two types of pension you’ve got is nonsense. The member doesn’t see the difference. It’s a bit like a petrol car and a diesel car. They’re both cars,” he said.
