The Pensions Regulator

Q&As: DC schemes

.

.

Regulation
Governance
Administration
Investment
Charges
Retirement
Member understanding

---

Regulation

Why is the Pensions Regulator getting involved in DC schemes?
What action is the regulator taking to improve the running of DC schemes?
Does the Pensions Regulator run the risk that it will add to the challenges of running DC schemes?
Who regulates occupational DC schemes?
Who regulates group personal pensions (GPPs)?
Why is the Pensions Regulator involved in GPPs when the policyholders are individuals?
Is a trust-based scheme better than a GPP?
Does the Pensions Regulator regulate AVCs?
Does the regulator treat group self-invested personal pensions (SIPPs) differently from ordinary GPPs?
What does the regulator expect of schemes which provide both DB and DC benefits?

Why is the Pensions Regulator getting involved in DC schemes?

• We regulate work-based pensions and will be the regulator of the personal accounts scheme.
• We have a responsibility set out in legislation to regulate DC schemes that are work-based pensions.

  These include:

  • occupational pension schemes;
  • personal pension schemes where direct payment arrangements exist (whether in respect of employee or employer contributions); and
  • stakeholder pension schemes.

  For convenience, in this guidance we refer to the schemes in the last two bullets above as group personal pensions (GPPs).

• We work closely with the Financial Services Authority (FSA) who has regulatory responsibilities in relation to GPPs.
• Virtually every pension scheme has DC benefits whether these are main benefits or additional voluntary contributions (AVCs). At the moment it looks as though DC will be the principal form of pension provision for many employees in the future. It is therefore critical that firm foundations are laid for the growth of DC schemes and the introduction of personal accounts.
• The House of Commons Public Accounts Committee has recently completed a report on the regulator in which it makes clear its expectation that we will direct our regulatory effort towards DC schemes.
• Our governance survey, responses to our DC consultation and qualitative research indicate that there is potential for improvement in the governance of DC schemes, particularly smaller ones (all documents available on our website).
• Certain aspects, whilst important for other parties, fall outside our statutory remit. In particular, it is not the regulator’s job to encourage people to join pension schemes or to encourage them to pay increased contributions.
  Our role is to improve confidence in work-based pensions by protecting members' benefits and encouraging high standards and good practice in running pension schemes.

What action is the regulator taking to improve the running of DC schemes?

• In order to mitigate risks to members’ benefits and to help people take opportunities to build on existing good practice, we're adopting the following approach:
  • providing education and guidance;
  • working in partnership; and
  • intervention proportionate to the level of risk
• We've produced e-learning for trustees and codes of practice. Working with people who have an involvement in pension schemes and with other government bodies (the FSA for example) we're producing good practice guidance. You might want to take a look at our guidance on employer involvement in GPPs, the retirement options process in occupational schemes and our consultation document on speeding up winding up.
• Where issues arise, we work with those involved to resolve them, for example recovering unpaid contributions from employers.
• In most cases, education, dialogue and collaborative working mean that there is no need for further intervention.
  However, we have powers that we can use as a last resort, for example we can issue improvement notices where there has been a breach of legislation, we can appoint trustees and we can wind up schemes.
  We will, of course, act sooner where the circumstances require, for example in possible cases of fraud.
• The focus of both the Government and the regulator is on raising the standards of the many schemes towards those of the best.

Does the Pensions Regulator run the risk that it will add to the challenges of running DC schemes?

• We're committed to ensuring that the regulation of DC schemes is proportionate to the risk to members’ benefits.
• We've discussed this issue with many stakeholders and we understand the worry some people have that employers may be discouraged from offering DC schemes due to over-regulation.
• The requirements on trustees derive from the following main sources: legislation, the rules of the scheme in question, and trustees’ duties from case law.
  The regulator is not the originator of these requirements – our role is to encourage trustees and others to meet the requirements. Ultimately, the regulator may take action if they do not do so. We will take no action against trustees who fulfil their duties and obligations.
• We will continue to fulfil our statutory objectives by providing guidance and good practice examples for the many employers and trustees who want to improve the way their scheme is run.
• The House of Commons Public Accounts Committee has recently completed a report on the regulator which comments that “in the regulation of money purchase schemes…much remains to be done [by the regulator] in improving standards of scheme governance and communications with members.”

Who regulates occupational DC schemes?

• The Pensions Regulator is the UK regulator of work-place pension schemes. These can be divided into two broad groups:
  • group personal pensions (GPP); and
  • occupational schemes which are usually set up under trust by an employer for the benefit of its employees.
• We regulate the vast majority of private sector occupational DC schemes and requires that these schemes register with us. Information about registration is available on our website.
• We also have some regulatory responsibilities in relation to certain aspects of public sector schemes.
• The FSA does not regulate occupational schemes, although they usually regulate the investment managers appointed by trustees of these schemes, in relation to their investment management activities.
• Occupational schemes need to register with HM Revenue and Customs (HMRC) in order to gain taxation advantages for the employer and members. Find out more about registration with HMRC by viewing the registered pension schemes manual on the HMRC website.
• Employers can also apply to HMRC for their occupational scheme to obtain contracted out status. Find out more on the HMRC website. And see Governance - What impact will personal accounts have on existing DC schemes?

Who regulates group personal pensions (GPPs)?

• Legislation puts responsibility for regulating GPPs  on both the FSA and the Pensions Regulator. We focus our attention on different aspects, as required by the legislation which has given each of us different objectives and powers.
• The FSA regulates the providers of all personal pensions, whether or not there is any employer involvement. We only regulate work-based personal pensions, ie where contributions are paid by the employer (either on its own behalf or where it is remitting the employees’ own contributions) and stakeholder pensions.

  Personal pensions fall outside the Pensions Regulator’s scope once there are no contributions being remitted via the employer.

• The FSA focuses mainly on sales, marketing, disclosure and the prudential management of providers, for example systems and controls, and the appointment of senior management.
• Some key areas that we focus on are good governance, administration and employer responsibilities.
• In areas of interest to both regulators, for example administration, we liaise closely.
• We've produced a guide jointly with the FSA on the regulation of GPPs, including examples of how specific scenarios would be approached.

Why is the Pensions Regulator involved in GPPs when the policyholders are individuals? 

• We have a statutory responsibility to regulate DC schemes that are work-based pensions.

  These include occupational pension schemes, personal pension schemes where direct payment arrangements exist (whether in respect of employee or employer contributions) and stakeholder pension schemes.

  The Pensions Act 2004 gives us specific objectives in relation to these schemes.

• Personal pensions fall outside our scope once there are no contributions being remitted via the employer.
• The FSA also has regulatory responsibilities for personal pensions and stakeholder schemes and we liaise with them to ensure a joined-up approach to regulation.

  The respective roles of the two regulators are set out in our joint guide on the regulation of work place contract-based pensions and our Memorandum of understanding, both available on our website.

Is a trust-based scheme better than a GPP ?

• The regulator does not have a view on which type of scheme employers should offer. This is a decision for employers, which must be taken based on their own circumstances and objectives.
• The regulator’s role is to protect work-based pension scheme benefits and promote and improve the understanding of good administration, regardless of the type of scheme.
• The government plans that with effect from 2012, all employers with employees earning over approximately £5,000 pa will be required to enrol them into a pension scheme of a prescribed standard.

  As at present, it's proposed that it will be the employers’ choice as to what pension scheme to offer employees, with the additional choice of a new personal accounts scheme for those employers not wishing to offer an alternative scheme.

Does the Pensions Regulator regulate AVCs?

• AVCs are additional contributions paid by the members, to their occupational scheme. They may be applied to provide benefits on a 'money purchase' basis.

  If they are paid to a DC scheme, they may be applied in a similar way to the members’ defined contributions.

• Benefits derived from AVCs form part of the benefits of an occupational scheme and therefore fall within the scope of our statutory objectives.

  This means that we are required to protect the benefits resulting from payment of AVCs and to promote and improve the understanding of good administration of AVCs.

• Our DC guidance is therefore of relevance to trustees and others involved with schemes providing DC AVCs.
• It's important that DC AVCs are not neglected by DB trustees, for example due to a focus on the funding of the DB section of the scheme. The governance standards of a DC AVC scheme should be as high as those of a DC-only scheme.
• We are aware that the AVC administrator is often different from the main scheme administrator, which introduces an additional complexity to the administration of such a scheme.

  Trustees should ensure that communication channels are adequate to ensure good administration.

• We do not regulate free-standing AVC schemes (FSAVCs) which are individual policies taken out by some members to top up their occupational scheme. These policies are regulated by the FSA.

Does the regulator treat group self-invested personal pensions (SIPPs) differently from ordinary GPPs?

• A SIPP is essentially a personal pension offering wider investment choice than would normally be available in a personal pension.
• The legislative requirements for employers offering group SIPPs are the same as for employers offering standard group personal pensions.
• Aspects of group SIPPs which employers may wish to look at carefully are:
  • Member understanding – given the (often) wider investment choice under group SIPPs, are their employees equipped to make appropriate investment decisions?
  • Fit to workforce – how does the investment sophistication fit with the profile of the workforce, given the increased responsibilities on members due to the wider investment choice?
  • Charges – what are the charges and how do these compare with other SIPPs and GPPs? Employers may wish to use the FSA comparison tables which show the differing charges from providers of personal pensions and stakeholder pensions.
• The greater complexity of SIPPs is likely to be reflected in a more sophisticated voluntary governance arrangement by employers who want to monitor the effective operation of the scheme.

  If you have a SIPP, or if you're considering introducing one, you should refer to our guidance on voluntary employer engagement in work place contract-based pension schemes.

• The FSA has provided some commentary for financial advisers on the suitability of SIPPs.

What does the regulator expect of schemes which provide both DB and DC benefits?

• Many schemes provide both DB and DC benefits. These may operate as separate sections or there may be an interaction between the benefit types, depending on the scheme design. A common type of dual benefit scheme is a DB scheme which also includes DC AVCs.
• Trustees of such schemes need to understand the requirements in respect of both types of benefit.
• This means that they're required to have broader knowledge and understanding requirements than trustees of schemes only including one benefit type. The requirements are set out in our scope guidance.
• It's important that a member with DC benefits can expect the same high standards of governance regardless of whether the scheme provides DC benefits only or also provides DB benefits.

  For example, whilst DB funding issues rightly demand a lot of attention from the trustees, they should ensure that any DC benefits in the scheme continue to be well-run. 

• Where a scheme includes both DB and DC benefits, occasionally, the scheme rules may be drafted in such a way that, in certain circumstances, the DC benefits could be used to make up any shortfall in DB benefits in certain circumstances.
• Trustees of such a scheme may wish to consider with the employer whether to segregate the two sections and ensure that any possible impact on the DC benefits is adequately communicated to members.

.

.