The National Audit Office (NAO) published its report this week on the regulation of defined contribution (DC) pensions and concluded that there is "insufficient accountability" to ensure that the regulatory system delivers value for money.
The NAO said that the way The Pensions Regulator (TPR) and the Financial Services Authority (FSA) measured performance made it impossible to judge whether it was actually protecting members' benefits.
The report also highlighted the differences between outcomes in DC schemes, with members contributing the same amount and experiencing exactly the same market performance seeing a variation in pension payouts by as much as 17%.
Currently some 3.4 million people in the UK save into a DC pension scheme and this figure is to go up with an estimated 5 to 8 million in the years 2012–2017, when auto-enrolment comes into effect.
The NAO stresses the importance of the effectiveness of pension regulation to the taxpayer. In the year 2010-11 alone tax relief for employer-sponsored DC schemes amounted to an estimated £8.5bn. With fewer companies offering defined benefit (DB) schemes to new members and with auto-enrolment around the corner, the trend is towards DC. This increases longer-term risks to the taxpayer, as members are on average likely to achieve "considerably lower levels of retirement income than those with predominantly DB pensions", the NAO says, adding that the state is ultimately liable for providing a basic income for the elderly if private pensions fail.
In the 52-page report the Audit Office also warned that clear communication to members was lacking, saying: "Differences in annuity rates can reduce the value of a pension, but 30% of trust-based scheme members do not recall being made aware of the option to choose a different annuity provider."
One of the problems, it is suggested, might be the lack of having one organisation which is responsible and accountable for the regulatory system as a whole. TPR is the body responsible for protecting DC member's benefits and also shares the responsibility for regulating contract-based schemes with the FSA. The Department for Work and Pensions (DWP) oversees the work of TPR, and the Treasury is responsible for setting the overall legislative framework within which the FSA operates.
NAO commented that the lack of a joined-up approach means there is insufficient basic information available about the market, such as definite numbers of scheme members or the levels of fees and charges they face. It says there is "no overarching system for measuring the performance of both TPR and the FSA in reducing risks to members."
Amyas Morse, head of the National Audit Office, commented: "Responsibilities for regulating pensions are shared, and the agencies involved need to develop a concerted approach to assess and, where necessary, act upon risks.
"The DWP and the Treasury should therefore work with TPR and the FSA to develop a more integrated approach to collecting evidence, assessing risks to members, and measuring the effectiveness of pension regulation."
Michael O'Higgins, chair of TPR, said: "We have been open about the challenges and risks in DC pensions and have been at the forefront of the industry debate on how to improve outcomes for members. We will reflect upon the NAO's comments as we take forward our work with government bodies and the industry to protect members of DC schemes through effective regulation."
For more information you can view the full report here.
First published 12.07.2012
azeevalkink@wilmington.co.uk
