Trafalgar House’s Michael de Souza explains what the Pensions Regulator’s corporate plan for 2018-2021 means for pensions administration.
Action points
Take action on cyber security by implementing a robust risk assessment and response plan
Continue to focus on high-quality data by adopting a testing and improvement plan
DC processes will come under increased scrutiny so make sure they are thoroughly tested and audited
The plan sets out how the landscape for UK pension provision has progressed, with the number of active defined contribution schemes now firmly overtaking that of defined benefit. DC membership has increased by 29 per cent to 12.6m over the past year, and a whopping 460 per cent since the start of 2012.
There are indications that more active interventions could be on the horizon for schemes with persistent problems of poor quality
On the other hand, DB membership remains in terminal decline – with the number of members reaching a mere 10m. There has also been a huge rise in the number of mastertrusts out in the market over the past few years, which collectively hold more than £16bn in assets.
Technology presents both opportunities and risks
Given this significant imbalance, it is unsurprising to see the regulatory focus on DC administration increasing under the corporate plan. In a nod to this, the report highlights the risk profile of DC schemes increasing, especially under recent DB to DC transfer activity taking place that has been stimulated by pension freedoms.
On a macro level, the regulator points to four broader risks impacting the pension market and, most significantly for administrators, it highlights the opportunities and threats from the increased use of technology.
Technological innovation is the biggest opportunity and area of potential change for administrators. With the power to unlock increased efficiencies, better member outcomes and more innovative ways to engage members, many administrators are now investing heavily in new automation platforms.
But with innovation comes risk, and the Pensions Regulator acknowledges the growing cyber security threats that inevitably arise as a result of increased technology adoption and growing membership numbers. This is an area where further regulation and guidance should be anticipated.
The watchdog’s eight priorities remain broadly unchanged with “enhancing and executing effective regulatory approaches across all schemes” and “promoting good trusteeship through improving governance and administration” having the most significant impact for administrators.
To support its aspiration of more active intervention, the Pensions Regulator has called for improved data sets among schemes, especially in areas that represent the highest risk to members. Administrators should therefore expect more reporting through the scheme return on high-risk transactions or errors.
Keep an eye on data quality
January 2018 was the deadline for schemes to submit their common and scheme-specific data scores to the regulator as part of the scheme return. So far, very little publicised action has been taken against schemes that have reported poor scores, with most assuming that reporting will be used as a behavioural characteristic for measuring effective scheme governance.
But with the regulator’s focus remaining on good quality data as the foundation of a well-managed scheme, there are indications that more active interventions could be on the horizon for schemes with persistent problems of poor quality.
Trustees and administrators have often been left to make their own judgments and interpretations on regulation.
The watchdog intends to be more prescriptive with its guidance, and this is going to include consolidation of existing standards covering both government and the industry. This will help ensure more schemes are operating to the same standards.
Currently, administrators must consider multiple forms of guidance from various working groups and government bodies, as well as determine how certain sections of the regulatory framework should be applied.
The new corporate plan aims to set out what the industry should expect from its new ‘clearer, quicker, tougher’ regulator, and flowing from this is a need for administrators to recognise the changing risk environment and member needs so they can deliver an administration service fit for the future.
Michael de Souza is technical and compliance manager at Trafalgar House
