Mercer welcomes the National Audit Office (NAO) report on the regulation of defined contribution (DC) pension schemes but warns against an industry response to the report based solely on the pros and cons of whether to merge the Pensions Regulator (the Regulator) and the Financial Services Authority (FSA). In order to deliver the essential objective of enabling better member outcomes, those who run defined contribution (DC) schemes can and should look to do more within the existing regulatory framework to improve the quality of scheme governance.
The National Audit Office was charged with reviewing the regulation of DC pensions, including the powers of the Pensions Regulator. In its final report it concluded that there is insufficient evidence to be able to determine whether the existing regulatory system delivers value for money.
The NAO audit also found that the engagement and quality of trustees representing members vary across trust-based schemes. “It sounds obvious but the effectiveness of the trustee board can have a significant impact on the ability to provide better outcomes for members of trust based DC schemes,” commented Rachel Croft, Principal at Mercer. “In some cases a step change may be required as many trustee boards have understandably focused more on the defined benefits (DB) sections of their schemes to date.
“Improving the quality of governance of all DC schemes, whether trust or contract, to optimal levels is likely to have a strongly positive impact on outcomes for members. Useful measures to take include ensuring trustee boards or governance committees have the skills, knowledge and expertise specific to the governing of DC schemes. Where trustees govern schemes with both DB and DC benefits, they need to recognise that the skills needed to oversee the DC section can be very different from those required in relation to the DB arrangement.”
Ms Croft added: “A regular assessment of the performance of the board or committee within a spirit of continuous improvement, rather than as a tick-box exercise, should achieve better accountability to members within the current system.”
A recent Mercer survey found that two-thirds of employers currently plan to use existing schemes as their auto-enrolment vehicles, which will make the quality of scheme governance even more significant as membership is significantly expanded.
Mercer agrees with the NAO’s view that DC regulations have too many chiefs and reiterated the need for the Regulator to work with the FSA, the Department of Work and Pensions, National Association of Pension Funds and the Investment Governance Group to consider consolidating existing guidelines and frameworks.
“With so many guidelines, recommendations and regulations coming from various sources we risk experiencing a classic case of ‘too many cooks will spoil the broth’,” said Paul Macro, UK Head of DC in Mercer's retirement business. “Many of those who are responsible for DC arrangements are feeling overwhelmed by all the guidelines and regulations they need to consider. In the short term, clarification of roles and further co-operation between the regulatory bodies would help them focus on their key objective – improving member pension outcomes in retirement.”
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