Small and medium-sized defined contribution schemes are falling behind on governance compliance, Pensions Regulator research shows, with the watchdog vowing to use its powers where necessary.
Legislative requirements for DC scheme trustees introduced in April this year raised the governance bar for more than 30,000 schemes across the UK.
Results of asurvey of 500 single-employer schemes and 20 mastertrusts conducted by the watchdog during January and February, published this week, showed a high proportion of small and medium-sized schemes have not yet reviewed their governance standards against the quality features underpinning the regulator's DC code of practice.
Knowledge and understanding
Andrew Warwick-Thompson, executive director for DC, governance and administration at the regulator, said all schemes were required to fulfil their legal obligations and those who failed would be subject to scrutiny.
“We’ve been through a phase now where the regulator was seeking to encourage schemes to… do the right thing through the code and the guidance we gave,” he said.
Governance requirements legislated in April 2015
Trustees of DC schemes are now required to ensure their scheme:
meets new governance standards and explains how it has done so in an annual chair’s statement
has an appointed chair who signs the annual statement
is compliant with the new charge controls where it is being used by employers to comply with their new duties under auto-enrolment legislation
“That wasn’t happening fast enough so I think the government quite rightly now has said 'ok, we’re going to make some of these things mandatory’.”
Warwick-Thompson said the regulator aimed to enable, enforce and educate but ultimately schemes had to cooperate and take action to meet the required standards.
He said there will be further communications during the course of this year, adding: “We will seek to help schemes that are struggling with compliance to enable them to do the right thing but ultimately if they don’t... we now have new powers to enforce and we will use them.”
Consolidation v paternalism
Over the longer term, Warwick-Thompson said, substantial consolidation across the DC market would help drive up governance standards.
He said: “We don’t want to see more sub-scale schemes set up because that’s just going to add to the legacy problem we’ve already got.
We will seek to help schemes that are struggling with compliance to enable them to do the right thing but ultimately if they don’t... we now have new powers to enforce and we will use them
Andrew Warwick-Thompson, The Pensions Regulator
“In the long run I’d like to see the vast majority of DC schemes that exist at the moment moving their members and assets into large, well-run, scalable solutions.”
However, Saq Hussain, head of DC consulting for the north at PwC, has seen a resurgence of paternalism among employers since new pension freedom reforms were announced in the 2014 Budget.
"Certainly over the past year since the Budget I’ve worked with a number of clients who’ve taken a step back to think through what is right for their workforce.”
Hussain said employers wanting to retain some control over their company pension need to think very carefully about the commitment required to fulfil governance duties.
Duncan Buchanan, partner at law firm Hogan Lovells and president of the Society of Pension Professionals, said the industry should be wary of a wholesale move into a market dominated by mastertrusts.
“We shouldn’t lose sight of the fact that mastertrusts are being run for a profit,” he said.
“The traditional trust-based occupational pension scheme was set up by a paternalistic employer that wanted to provide for its employees. They are two business models,” he said.
He added: “That’s not to say I’m anti mastertrusts. If you’re the regulator and you’re required to regulate workplace pensions, your job’s a lot easier if you’ve got 10 or so large, well-managed mastertusts.”
