Regulator: How schemes can better protect members

Our Annual Report and Accounts, published last week, highlights many of the challenges we have all faced during the year. It also tracks the progress we have made in mitigating many of those risks.

We have made positive steps in many areas and have laid down strong foundations for our activity in the coming years.

Protecting members of defined benefit (DB) schemes

We have now received the second valuation from those schemes who were the first to carry out a valuation under the scheme specific funding regime in 2005/6. This has given us our first opportunity to compare valuations from the same schemes.

Having carried out specific analysis of these recovery plans, we found more than 17% of employers pledged contingent assets to the scheme. This can be seen to reflect changes in the strength of the employer covenant and availability of cash.

Employer covenant has been a watch word during 2010/11. We have invested much effort into explaining our expectations around employer covenant and focused on ensuring trustees know how to make this support as tangible and dependable as possible.

Disappointingly our latest governance survey shows we still have some way to go before every scheme understands and regularly assesses employer covenant, but we will continue our efforts to improve this.

We have also continued to assess and mitigate the risks associated with corporate activity.

During the past year we have seen a number of instances where transactions have been designed with the specific purpose of removing the pension scheme from the company balance sheet. This is a concerning trend and one to which we are paying close attention.

Protecting members of defined contribution (DC) schemes

In DC we have laid down the foundations that will ensure our approach to regulating DC is fit-for-purpose for the future.

Our discussion paper, Enabling good member outcomes in workplace pension provision, set out our overarching goal – to support the DC market to deliver high quality good value pensions for members all DC schemes.

We believe all DC members should be enabled to achieve a good outcome from their savings, regardless of scheme size or type, and whether the individual member is willing or able to actively engage in decision-making.

We received a large number of responses to our discussion paper on DC pension provision and have spent the past month or so considering the industry’s thoughts and our next steps.

Very shortly we will publish our initial thoughts and later in the year we will publish more detail on our strategy going forward.

Preparing the industry for automatic enrolment

Our biggest new challenge in 2010/11 was related to our newest objective – to maximise compliance with the employer duties. In April this year we passed an important milestone. We are now less than 18 months away from the first employer staging dates.

In April the chief executives of those employers with staging dates in October 2012 received a letter from us. We also wrote to our existing scheme contact for that employer.

This is the beginning of a programme of communication that will see us write to every employer in the country to let them know when they need to comply and how they can find out what they need to do.

Every employer will receive a letter at least at 12 months before their staging date and again three months before their date.

While only the very largest employers will have staging dates in the early stages of the new duties, it is still important all employers are aware of the reforms now. With this in mind we have developed a range of information for various segments of our industry.

Our research has highlighted the different information requirements of the various audiences, and our communication approach is based around those different needs.

During the past year we have designed detailed guidance for larger employers and their advisers. This explains the legislation to help employers understand what they have to do and when.

For smaller and less pensions-aware employers we have designed a set of interactive tools that help employers to understand the basics, including when the duties will apply to them, which workers will need to be automatically enrolled, and an approximation of the cost of contributions.

This communications activity will increase during 2011/12 and will continue throughout the staging profile.

The year ahead

In 2011/12 you can expect to hear more from us on a range of key issues. These will reflect our three core ongoing focus areas.

We will publish more detail on the way we will regulate the DB market, as the balance of open and closed schemes continues to shift.

You can also expect to see much more detail about our approach to regulating DC schemes so that the market is able to support automatic enrolment.

Finally you will see an increase in our communication to employers about how and when they will need to comply with the new duties and how the wider industry can support them.

To view the full annual report and accounts click here.