Professional March 2020

Pensions

Pension regulators

Ian Neale, director at Aries Insight, explains why we need a new culture

W hy have pensions got such a bad image? You’d think some assurance of income in retirement, to supplement a still-meagre state pension, would be welcome. Instead the popular perception is of a small army of predators eager to part individuals from their savings. Not even old-fashioned final salary schemes escape suspicion, when seeming to block member transfers to personal pensions. Government is by no means absolved. Since the 1980s several radical changes in the legislation, ostensibly designed to give individuals more control over their future finances, also highlighted the opportunity for others to intervene and make money for themselves. Responding to the mayhem their actions fomented, governments decided regulators were needed. Though initially it was thought that in the arena of personal pensions, self-regulation could work, it failed. In 2001 the Financial Services Authority was set up to control the market but hardly a success it was replaced in 2013 by the Financial Conduct Authority (FCA), plus the Prudential Regulatory Authority to deal with the banks. Since then the FCA has been paying more attention to pensions, sharing responsibility with The Pensions Regulator (TPR) for regulating workplace pensions. The advent of auto-enrolment in 2012 permitted so-called group personal pension (GPP) schemes to be used by employers as an alternative to occupational pension schemes to fulfil their duties. GPPs and their providers are regulated mostly by the FCA, whereas occupational schemes are the province of TPR. The Pensions Act 2004 set up TPR to replace the Occupational Pensions Regulatory Authority which had not covered itself with glory since being created by the Pensions Act 1995. TPR was to be more

proactive, using its information powers to target schemes judged to be high risk or inadequately managed; in the case of final salary schemes, particularly to reduce potential claims for compensation from the Pension Protection Fund (PPF). What has happened in the last 15–20 years has been a remorseless growth in both regulators and their powers, as well as a huge panoply of rules and regulations. ‘Compliance’ is increasingly the watchword for pension providers, and a ‘tick-box’ culture has arisen, in part because often there is no time for anything better. ...too often the horse has well and truly bolted ... There is, however, a glimmer of hope that the regulators themselves might be realising this is not working. The FCA has acknowledged that its own rulebook is so ramified and complicated it doesn’t fully understand it. The advisory sector is under threat from the weight of claims for non- compliance and ‘mis-selling’ and shrinking availability of professional indemnity (PI) cover at affordable rates (or indeed at any rate). A new data strategy announced this year by the FCA promises to reduce the burden on firms by ‘working smarter’, meaning using advanced data analysis techniques to identify where it needs to intervene, and to act more quickly. A frequent criticism has been that too often the horse has well and truly bolted by the time the FCA notices the stable door open – the recent scandal involving London Capital & Finance being an egregious illustration of the limits to FCA competency. Meanwhile, trust-based pension schemes and their sponsors anxiously await a new defined benefit funding

regime, alongside a raft of new powers for TPR to intervene in scheme management, in the 2020 Pension Schemes Bill. A few very high-profile cases in recent years, such as Carillion and BHS, have reignited fears that politicians might have forgotten lessons that should have been learned in the aftermath of the ‘Maxwell’ episode a generation ago. The danger is that under pressure to maximise protection of benefits, TPR mandates an unwieldy governance framework that in many cases virtually guarantees a tick-box approach as the only way for scheme administrators to manage within budget. We have seen signs of this in the way the requirements for the annual chair’s statement for defined contribution schemes have expanded (with mandatory fines for any omission). The answer to misbehaviour by a minority is not more regulation that affects everybody, nor more powers for regulators. Neither is more financial compensation for victims the solution, because it too has to be paid for by higher levies. The knock- on effect on PI fees also adds to the cost of doing business and the availability of advice. In promising new capabilities and a new culture, the FCA might be on the right track with their new data strategy. This could feed into the joint regulatory strategy with TPR that’s been progressing since October 2018, seeking among other things a common language across the industry to improve clarity. A consultation is expected from the FCA this year on a stricter definition of ‘value for money’, another key element in promoting pension saving. If new and more intelligent methods of risk assessment do reduce the compliance burden, the cost of pension provision should come down and the value of pension saving increase. Working smarter for a win-win outcome. n

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| Professional in Payroll, Pensions and Reward |

Issue 58 | March 2020

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