Over the last decade in the UK there has been a huge shift away from defined benefit provision in favour of defined contribution provision for future service pension provision. There are in fact now in excess of 200,000 different defined contribution arrangements in the UK. Up until October 2012 the shift towards defined contribution provision was generally a consequence of employers seeking to control costs – something that can be incredibly difficult to achieve when operating a defined benefit arrangement. Participation in defined contribution arrangements has further increased since October 2012, and is set to continue to do so, following the introduction of auto-enrolment requirements. Interest in switching to defined contribution for future benefits is set to further increase if the proposed new Solvency II type rules, which the European pensions authority revealed recently could increase UK pension fund deficits to at least £450bn, are brought into force.
The increased level of retirement savings held in defined contribution schemes and the increased number of defined contribution scheme members has sparked a lot of interest in the pensions industry. Many have claimed that there is a lack of governance meaning, amongst other things, that members are not properly informed as to their rights and options.
The Pensions Regulator is certainly one of the interested parties and has issued a draft Code of Practice and draft Regulatory Guidance on the topic of "Governance and Administration of defined contribution trust-based schemes". The documents codify what should be best practise and include points such as managing conflicts of interest and knowing your scheme.
It is proposed that these governance requirements will apply to any trust-based pension arrangement with two or more members which has an element of defined contribution benefits, however, there is concern that in only applying this governance to trust-based schemes the members of over half of the defined contribution arrangements in the UK, i.e. those which are contract-based arrangements, will be left unprotected.
One concern is that the proposed extra level of governance will drive employers away from trust-based contribution schemes, towards contract-based contributions schemes in a similar way that we've seen a switch from defined benefit to defined contribution provision. Any switch is likely to be less significant that the switch from defined benefit to defined contribution. However, the removal of the trustees from this picture must surely represent a worsening of the position for members, and one which should start some alarm bells ringing – particularly for members of affected schemes.
Whilst there are certain risks associated with added governance, the overall view is that the introduction of these protective measures is in the interests of the members of trust-based arrangements. This will become more and more important as the number of individuals who have never previously saved towards their retirement become auto-enrolled into a compliant arrangement. Many of these individuals will lack a reasonable degree of understanding about pension arrangements and it is good news that the Regulator has recognised this potential problem and is taking steps to address the issue.
Only time will tell whether this new raft of papers from the Regulator will have an impact on members' positions and whether it will be the trigger for another shift in the type of pension arrangement employers offer their employees going forward.
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