Employers are still in the dark over their role, risks and responsibilities when promoting pensions to employees. This is a strong indication that the Pensions Regulator (TPR) will focus attention in this area as employers are forced to auto-enrol employees into a ‘qualifying pension scheme’
Group Personal Pension Schemes (GPP) are rapidly forming the backbone of UK pension provision, however any recognised or accepted governance structure within these arrangements appears to be missing.
The Pensions Regulator has and will continue to raise awareness of the importance of governance in all types of pension schemes. With the accelerating transition towards contract-based Defined Contribution (DC) provision, it is inevitable that focus will shift in this direction to ensure UK employees are investing their money in well designed and appropriately governed DC schemes.
There is no right or wrong answer when it comes to good governance in terms of using trust-based, contract-based or within the National Employment Savings Trust proposition. What is important is the role that governance committees will play in UK pension provision forming an invaluable buffer sitting between members, sponsoring employers and pension providers.
However, establishing an effective governance framework will be an increasing challenge for employers in their role as scheme sponsors of contract based schemes such as GPPs. Trustees of occupational pension schemes such as Defined Benefit Schemes (DB) have had a fiduciary framework to follow for some time. The Pensions Regulator has repeatedly stated that strengthening the funding position of DB schemes and reducing the risks to members of DC schemes is one of its key aims to improve the governance of pension schemes, especially focusing on Group Personal Pensions. At the same time, greater demands are also being placed on existing governance structures.
On a topical note reference will be drawn to investment propositions, as the strategies adopted by pension schemes become more complex. Governance is not just a compliance activity or a cost overhead simply to put a tick in the box. Effective governance structure is likely to be a pre-requisite for any pension scheme.
Whether employers choose to get engaged or not, their level of engagement will depend upon many factors, for example the size of the employer and whether they had any trust-based schemes in the past. A large employer with a new GPP set up as a replacement for a DC trust-based scheme may well be familiar with setting up a structure to engage in the way TPR wants. On the other hand a new, small employer with just 6 or 7 employees may not see the value of spending time and effort in getting too involved.
Assuming that there will be employers who will want to engage in their contract-based scheme, exactly how they do so will be entirely up to them. TPR breaks down the activities into three areas, member concerns, HR employer issues and monitoring services.
‘Member concerns’ is self explanatory and focuses on increasing member understanding and engagement through improved member communication and providing additional support, for example work-place presentations to employees.
‘HR-Employer issues’ is more about the bigger picture. For example, examining why the scheme is provided in the first place and setting contribution rates.
The ‘monitoring’ of the scheme deals with the selection and monitoring of the provider. For example, is the charging transparent, sustainable and does it represent good value for money, something of course that the Retail Distribution Review, is also partly concerned with. Pension schemes are paying vastly different fees and applying different charging structures for the same levels of service and even with the same provider. For many schemes, fees could be reduced significantly by reviewing the fee structure, challenging advisors and providers over the nature and extent of work that is being carried out, and conducting regular reviews testing the market so that sponsoring employers and trustees have a regularly updated yardstick with which to assess the annual fees being incurred by their scheme. At least a review may see improvements in advisor/client relations, as the advisors explain what they are doing and where they are adding value.