Approach to work-based personal pensions

Principles and features for good quality pension schemes Initial analysis of the presence of the regulators defined contribution quality features in FSA regulation of work-based personal pensions

January 2013

Principles and features for good quality pension schemes

Contents Introduction 3

The scope and approach of this analysis 4

Conclusion and next steps 5

Initial analysis of the presence of the regulators defined contribution

quality features in FSA regulation of work-based personal pension schemes 6

Summary of analysis 22

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Principles and features for good quality pension schemes

Introduction On 10 January 2013, The Pensions Regulator (the regulator) published a public consultation on a new regulatory approach to defined contribution (DC) work-based pension schemes. This approach is centred on the core aim that members of such schemes are placed in products that are effectively governed, durable and offer value for money. The new regulatory approach has at its heart six principles, plus detailed underlying quality features, which represent the quality standards the regulator expects trustees of pension schemes to achieve.

This document, published alongside the public consultation, sets out an initial analysis by the regulator on the presence of the underlying DC quality features in the Financial Services Authority (FSA) regulatory regime (and its successor bodies, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA)) for work-based personal pensions (also known as contract-based schemes).

The FSA and the regulator have a shared role in work-based pensions. The FSA supervises the financial services industry in the UK and The Pensions Regulator is the UK regulator of work-based pension schemes.

This initial analysis has been developed in conjunction with the FSA and is an important step in understanding how the two regimes (work-based personal pensions and occupational DC trust-based pension schemes) will work together in delivering good quality standards across all work-based pension arrangements.

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Principles and features for good quality pension schemes

The scope and approach of this analysis The regulator and the FSA both have regulatory responsibilities for work-based pension schemes. We are working closely with the FSA to promote equally high standards across both trust- and contract-based arrangements, even though the rules may be articulated differently.

The regulator was established under the Pensions Act 2004 and works to improve confidence in work-based pensions by protecting members benefits and encouraging high standards and good practice in running pension schemes. This complements a trustees fiduciary duties, in addition to acting in the best interests of scheme beneficiaries.

The FSA is the primary regulator of the product providers and fund managers involved in work-based personal pensions and aims to promote efficient, orderly and fair markets and to help retail customers achieve a fair deal. The FSA has a handbook of rules and guidance which forms the basis of its supervision of authorised firms and the Financial Services and Market Act 2000 (FSMA) gives the FSA power to amend those rules.

This document sets out an initial analysis of the presence of the regulators underlying DC quality features in the FSA regulatory rules and guidance made under the Financial Services and Markets Act 2000. We have taken each of the quality features and assessed them as follows:

1. The stated DC quality feature

2. The specific risk to members which underlies that quality feature

3. An example of the type of process or action which the regulator would consider mitigates that risk

4. A reference to one or more elements of FSA regulatory expectation which would indicate the presence of the process or action identified therefore mitigating or adequately managing that risk to members.

The DC quality features typically apply to those running schemes. In most cases, for personal pension arrangements, this will be the product provider (for example an insurer providing a group personal pension).

It should be noted that this document simply maps where the regulators DC quality features would be analogous to a specific section of the FSA handbooks, or stated regulatory expectation. This is an analysis purely of each regulators ability to act where member or consumer detriment is found. It does not cover the likelihood or nature of active enforcement of rules in any way.

The regulator will be developing detailed enforcement policies for DC work-based pensions schemes over the coming months and a key part of this will be working with the FSA (and the FCA and PRA from April 2013) to agree any new working protocols between the regulators on breaches as they are discovered. Further information on the operational interaction between the regulators will therefore be published later in 2013 as part of our detailed enforcement policies for DC schemes.

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Principles and features for good quality pension schemes

Conclusion

This analysis has involved many hours of in-depth examination and discussion on the extent of the FSAs available powers and stated regulatory expectation in respect of the regulators underlying DC quality features. This has been carried out not only with the support of the FSA but also with representatives of their regulated community. The regulator has therefore been able to understand through this work not only what the FSA expects, but also what FSA-regulated entities do to meet and demonstrate compliance with these expectations. We are grateful for this technical and collaborative input.

The FSA regulates its community through a wide range of rule-making, investigatory and enforcement powers to achieve its four statutory objectives. This initial analysis has shown that these rules and guidance are in many ways parallel to the regulatory framework that applies to occupational DC trust-based pension schemes.

The regulatory expectations of work-based personal pension providers require that the regulators DC quality features should be demonstrably present in FSA-regulated commercial products, particularly in the kind of large scale group personal pension arrangements which are being marketed for automatic enrolment use. The regulator will continue to work closely with the FSA in promoting the adequate quality of DC pension products of all types.

Next steps This initial analysis is being published to coincide with the start of the regulators public consultation on its regulatory approach to DC provision, including a new draft code of practice and draft guidance for scheme trustees. We intend to publish this analysis in final form in spring 2013 to coincide with the start of business of the FSA successor organisations, the FCA and the PRA. The final version will reflect how the FSAs regulatory roles and responsibilities will be divided under the new regulatory structure and will also set out in more detail how the regulators intend to work together to continue to drive quality standards in DC work-based pension schemes.

In the meantime, this initial analysis is provided for information alongside the wider consultation on DC regulation.

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Principles and features for good quality pension schemes

Initial analysis of the presence of the regulators defined contribution quality features in FSA regulation of work-based personal pensions

DC quality feature The Pensions Regulator analysis of how the six DC principles and DC quality features manifest in work-based personal pensions

Principle 1: Essential characteristics Schemes are designed to be durable, fair and deliver good outcomes for members

1.1 All members receive value for money.

Risk to members which drives the DC quality feature Commercial arrangements may exist where charging structures will work to the detriment of certain classes of member (eg deferred members).

What does the regulator want to see in place to mitigate this risk? Providers should be able to justify where different levels of charges are applied to different classes of member.

How does this manifest in FSA-regulated products? PS 11/08 expects providers to ensure charging structures are appropriate to the customers they serve by carrying out regular reviews. Providers would be expected to be able to justify the fairness of their charging structures in line with the Treating Customers Fairly regime.

1.2 All costs and charges borne by members are transparent and communicated clearly at point of selection to the employer to enable value for money comparisons to be made and to assess the fairness to members of the costs and charges.

Risk to members which drives the DC quality feature Members retirement funds will be at risk if an employer selects a pension scheme with high charges that does not offer value for money.

What does the regulator want to see in place to mitigate this risk? Product providers must provide all relevant information to the employer at outset this includes product information, key features, full disclosure of charges, etc.

How does this manifest in FSA-regulated products? The FSA has no specific requirements for individual pension charges to be disclosed to the employer at the point of sale or at any other time although charges for advice to employers must be disclosed and agreed under the new consultancy charging regime.

In November 2012, the National Association of Pension Funds (NAPF) published a joint industry code on pension charges to help employers understand the impact of charges when select