What could we expect from the regulators’ joint pension strategy?

The past five years have seen significant change in regulatory developments, including auto-enrolment and the introduction of the pension freedoms.

Regulation must move with the times

It is important that regulation moves with the times by identifying the risks, making sure that consumers are protected in an ever-changing pension environment and introducing similar levels of governance and protection across regulation to minimise opportunities for regulatory arbitrage. 

The biggest risk is people not saving enough. It remains to be seen whether the regulators’ joint pension strategy will be able to mitigate this risk

Pension regulation is complex, with the Pensions Regulator and the FCA being the lead regulators, each with a different area of responsibility.

The FCA is responsible for regulating pensions and retirement income where the individual accesses their pension directly. Whereas the Pensions Regulator is responsible for regulating pensions where employees access pensions via their employers.

The FCA has a wide remit and focuses on ensuring that there is an appropriate level of consumer protection and competition.

It regulates providers of personal pensions, self-invested personal pensions and workplace personal pensions. It also regulates pension advice, asset managers and sets the regulations for contract-based schemes.  

Identifying emerging risks

The Pensions Regulator’s focus is more on governance, including making sure trustees of defined benefit schemes are managing funding risks, ensuring employers are complying with their auto-enrolment risks, and from October taking on mastertrust regulation.

It regulates all trustees of occupational pension schemes. But its regulatory responsibilities for auto-enrolment and new powers to authorise and supervise mastertrusts has shifted its approach closer to the FCA model.

The pension landscape is changing. Defined contribution is a growth market and it is here where many emerging risks are being identified.

Auto-enrolment has been a catalyst for change, with DC being the choice of most employers to comply with their auto-enrolment duties, leading to an influx of mastertrusts.

The pension freedoms have been a game changer with members transferring out of their DB scheme into DC so they can access their pension flexibly.

Meanwhile, mastertrusts are beginning to offer in-house retirement income solutions. And income drawdown has become the choice of many replacing annuities, often without advice. 

Against this new pension landscape the FCA and the Pensions Regulator have identified five areas where they believe they should act jointly.

The first is making sure that saving gets off to a good start. Auto-enrolment addresses this for most people in the workplace, led by the Pensions Regulator. The FCA has a role to play by having a strong regulatory framework that protects consumers, supports competition and helps to increase confidence in pensions.

The second area is making sure pensions are well-run and funded appropriately by having effective governance, strong leadership and appropriate systems and controls in place. The Pensions Regulator’s role is to drive up governance standards for trust-based schemes and ensure that DB schemes are adequately funded.

The FCA requires workplace pension providers to have independent governance committees, and its Senior Managers and Certification Regime strengthens governance and responsibilities.   

Will a joint strategy help?

The third area of joint focus is to make sure that retirement savings are safe in relation to investment risk. The FCA does this by regulating fund managers, and both regulators work together to tackle pension scams.

Value for money is the fourth area, which both regulators have a strong interest in. This includes making sure charge caps on default funds are adhered to and that IGCs and trustees understand their value for money responsibilities, both of which have resulted in lower charges.  

The final area is in relation to supporting people to make good choices and outcomes. The FCA has concentrated on the advice and information given around the pension freedoms, including potential remedies for those who enter drawdown without advice and DB to DC transfers.

The FCA and the Pensions Regulator believe there is scope for them to work together on these issues, in particular where people are vulnerable to making poor decisions. 

The biggest risk is people not saving enough, leading to an inadequate retirement income. It remains to be seen whether the regulators’ joint pension strategy will be able to mitigate this risk. 

Kate Smith is head of pensions at provider Aegon