In the lead up to the introduction of the government’s personal accounts system in 2012, and against the background of growing numbers of defined-benefit schemes closing to future accrual, the Pensions Regulator (the Regulator) is now turning its attention to defined-contribution schemes. On 22 July 2009, the Regulator issued a statement called ‘Engaged employers and informed retirement choices – key to good outcomes for members of defined-contribution pensions’.
July 2009 statement
The July 2009 statement is targeted at trustees and employers of trust-based defined-contribution schemes. It sets out how the Regulator aims to enable informed member choices at retirement and to improve the quality of employer engagement. In defined-contribution schemes, many of the important decisions affecting members’ benefits are made by the members themselves. If members do not fully understand the choices available, they may make poor decisions or take no action at all.
Retirement options and processes
The Regulator comments that only a third of trust-based defined-contribution schemes have reviewed their retirement processes in the last year, a third have reviewed them in the past three years and some schemes have never reviewed the processes at all. Therefore, a key priority for the Regulator is to ensure that trustees and providers enable members who are retiring today to make the right choices and that members are aware of all their options (including the right to an open market option to purchase an annuity from the provider of their choice).
To encourage improvement the Regulator:
- Has updated its member leaflets on retirement choices, including annuity types. These leaflets describe the range of options available to a member approaching retirement. They are designed to help trustees ensure their pre-retirement literature is of a good standard.
- Is reviewing the retirement processes and literature in a sample of trust-based defined-contribution schemes; where it finds shortcomings, it will expect trustees to make improvements and warns that it will use its enforcement powers if necessary. The Regulator intends to report on its findings later in 2009.
- Will update its online ‘trustee toolkit’ as new risks and issues relating to defined- contribution schemes emerge.
Increasing employer engagement
The Regulator considers that employer engagement is central to good defined-contribution scheme provision. In particular, it comments that where employers take an active interest in the pension they offer, they can encourage employee take-up and motivate employees to think about their retirement plans.
To help employers the Regulator:
- Is working with the Financial Services Authority on a guide that covers the information employers can give to employees and how employers can support their employees in relation to defined-contribution pensions (employers often have concerns in relation to potential liability when providing information to members, so this guidance may prove helpful).
- Encourages employers, trustees, providers and advisers to ensure they have clearly defined governance responsibilities (including regular monitoring of charges, review of scheme administration and investment options, and checking that the scheme continues to meet workforce needs). The Regulator has produced guidance on voluntary employer engagement to assist with this.
- Encourages employers to use the online ‘pensionwise’ information resources to help them understand the key pension issues they need to address, as well as how best to engage with their scheme.
Long-term defined-contribution focus
The Regulator reminds employers that from 2012 all employers must auto-enrol their employees into a qualifying workplace pension (either their qualifying scheme or into the personal accounts scheme). Please see the article on p78 for more details. The Regulator comments that in preparing for auto-enrolment in 2012 it is committed to making it as simple as possible for employers to comply with their new duties at the same time as ensuring that there is a robust regulatory framework for all types of workplace pension schemes. To assist with understanding of the current trust-based defined-contribution scheme landscape (including numbers of schemes and contribution levels), the Regulator has published an analysis of defined-contribution schemes.
Comments
Until now, only the Regulator’s October 2008 statement on the impact of the economic downturn touched substantively on issues for defined-contribution schemes. We welcome the fact that the Regulator has issued a statement aimed at those involved with defined-contribution trust-based schemes. While the July 2009 statement reiterates the points (albeit at a high level) made in the October 2008 statement, it does provide more detail as to what the Regulator is doing to ensure that members are able to make informed choices at retirement, as well as to improve employer engagement. We await the further promised guidance with interest.
Harold Lewis, partner,
Eversheds LLP.
E-mail:haroldlewis@eversheds.com.