The Pension Authority’s consultation on the future of DC pensions

The Pension Authority’s consultation on the future of DC pensions Ibec Seminar 27 March 2014 Mary HutchHead of Policy

Agenda • Why the consultation? • Issues of concern in DC schemes • Focus of consultation • Synopsis of submissions and some initial responses • Next steps

Why the consultation? • Future pension provision likely to be predominantly DC • Number of concerns about the current DC system • How can DC be best structured and regulated? • Ultimate objective is to ensure best possible outcomes for DC members

Issues of concern in DC schemes • Number of schemes, especially small ones • Number of trustees • Scheme governance • Costs

Focus of consultation • Trusteeship • Regulation • Investment • Disclosure • Value for money

Trusteeship The Authority’s view is that trustees performance needs to significantly improve in order to best protect members’ interests and that trustees should have to self-certify their competency and ability to meet specified knowledge and experience criteria before appointment and annually thereafter. Do you agree with this? • Broad agreement for the need to raise standards of trustee performance • Mixed views on whether self-certification would achieve higher competence levels • Several suggestions of the need to take scheme size into account

Trusteeship What would you suggest as minimum standards for trustee knowledge, understanding and behaviour? • Many positive and constructive suggestions offered • QFA Pensions • 15 hours CPD per annum • Fitness and probity standards stipulated by Authority • Broad agreement on areas trustees should be familiar with

Trusteeship Do you agree that the Authority should issue a code of governance in order to clarify the standards it expects of DC trustees? If not, what other vehicle could we use to provide further education and guidance for trustees in order to drive up standards of governance and administration? • High level of support for a Pensions Authority code of governance • Should be short, to the point, written in plain English and tailored in respect of size and complexity of DC schemes • Queries as to whether code will have statutory footing and consequences of non-compliance • Aim – DC code of governance to be produced sooner rather than later

Regulation The Authority proposes the introduction of legislation requiring new schemes to satisfy the Authority that scheme design and the trustees are fit for purpose before being granted approval. Older schemes could be given a time frame in which to comply with the provisions. Do you agree with this suggestion? • Vast majority of responses related to scheme design • General support for pre-approval of scheme design with caveats about unintended consequences, e.g. delays in Revenue approval, lead–in time being sufficient, creating barriers that might discourage employers from setting up schemes • Need to address number of single and very small schemes was a recurring theme - contracts and master trusts suggested • Aim - 100 to 150 DC schemes

Investment While it is important for defined contribution members to have investment choice, the options offered can be complex and default strategies not always suitable for the needs of members. Do you have suggestions as to how we can ensure that defaults offered are appropriate and do not expose members to unnecessary and unexpected amounts of risk? • Numerous suggestions offered under this heading • Proposals that Authority provide templates and best practice guides that encourages use of plain English, clearly explains risk, uses graphics and gives practical examples • Some advocated use of member benefit statements to set out details of members’ funds, investment performance and investment risks in year ahead

Investment Would it be helpful if the Authority produced practical guidance on the design and governance of default strategies? • Generally considered to be a good idea with various suggestions on the form such guidance would take • A “star rating” system was suggested whereby providers could submit documentation to the Authority and be scored on factors such as openness about risk, plain English and clear visual presentation – this could increase standards and provide trustees with a benchmark • Some indicated that investment guidance produced last year by Authority was sufficient • Aim – analyse submissions to see how Authority can support design of default funds

Disclosure Many members do not understand enough about their pension schemes to make informed decisions. Information given often has a legal purpose, with sometimes too much information given, and is not necessarily structured so that members are clear how it should be used to make decisions. How can member information be improved to ensure that it is accurate, clear and understandable and enable members to make informed decisions about their retirement savings? • Universal agreement that quality of member information generally needs improvement and that information disclosed needs to be clear, concise, layered, easy to understand, focused on key information and written in clear English with the member in mind

Disclosure • Current volume of information required is considered too high and language used is too legalistic – essential to distinguish between communication and information as key messages are getting lost in the detail • Suggestions were for simplified benefit statements with opening and closing balances and any changes in between broken down by contributions, investment performance, tax, levies, benefit payments and charges • Many calls for a complete review and overhaul of the Disclosure Regs • Action – internal project group established to produce model disclosure documents

Disclosure How can costs and charges borne by members be more clearly and transparently communicated to them? • Much support for a standard means of disclosing costs – RIY, TER or monetary amounts and percentage of fund • Proposals that Authority and CB work together to ensure consistent approach to communicating charges • Suggestions for publicly available register of charges • Action – Authority will prioritise development of e-learning module for trustees on fees and charges. In the meantime a ‘Charges Checklist’ for trustees is in development.

Value for money Trustees need to be demanding consumers on behalf of their members especially where smaller schemes, which do not benefit from economies of scale, are concerned. How can trustees be supported/educated to ask the right questions about the different costs and charges incurred by their scheme in order to enable value of money comparisons to be made and to assess the fairness to members of the costs and charges? • Many commented that value for money cannot only be about costs but must take account of service provided and overall benefits for members

Value for money • Other suggestions were for having a standard measure that would allow comparison and that Authority could produce a template set of questions for trustees to ask when analysing costs and publish a benchmark for typical costs • Trustees qualification criteria should be able to demonstrate a knowledge of charges • Action – VFM to be dealt with in the code of governance

Other Are there any additional points you would like to suggest on how the governance of defined contribution pensions could be improved? A diverse range of additional comments and suggestions were offered under this heading. Issues mentioned included: • The need for a level playing field from a regulatory and tax perspective for all types of pensions • Simplification of system • Frozen schemes • Single member schemes • Auto-enrolment • Costs, deferred members, narrow scope of consultation

Next steps • Detailed analysis • Report to Minister • Allow for transitional procedures and timing • Change management and implementation

Thank youA synopsis of responses to the DC consultation is available on the Authority’s website

The Pension Authority’s consultation on the future of DC pensions