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Review Finds Case For Pension Scheme Administrator Regulation

Tuesday, 21 November 2023

An independent review has urged the Department for Work and Pensions (DWP) to assess the case for formal regulation of pension scheme administrators after concluding that the current regulatory engagement provides an ‘unsatisfactory half-way house.’

Why was the review established? 

Last month, the DWP published an independent review of The Pensions Regulator (TPR). The review, which was set up to ensure the regulator remains fit for purpose, was led by Mary Starks, the former Director of Competition and Chief Economist at the Financial Conduct Authority. Work on the review was undertaken during the early part of 2023. 

Regulator ‘well-run’ and ‘well-regarded’ 

The report commended TPR on some notable successes in its track record, particularly in relation to implementation of Automatic Enrolment. It also pointed out that the regulator has ‘a coherent strategy focussed on clear outcomes with the interests of savers at its heart.’ Overall, the review concluded that TPR is ‘broadly well-run’ and ‘generally well-regarded by its main stakeholders.’ 

Three key themes identified 

During her review, Starks identified three main themes that regularly came up during her discussions with stakeholders: risk and growth; compliance and enforcement; digital transformation and value for money. These three themes underpinned 17 specific recommendations that the review felt would address TPR’s future strategic and operational challenges. Although Starks did not issue an explicit time frame for implementation of her recommendations, she did suggest the majority could be implemented within the coming year. 

TPR’s scope of remit 

One of the report’s specific recommendations relates to the scope of the regulator’s remit. The review noted that the pensions supply chain is ‘complex with many entities having influence over outcomes for savers.’ However, it also noted that not all these entities are subject to regulatory or professional body oversight, with pension scheme administrators in particular notably outside of the regulatory remit. 

‘Unsatisfactory half-way house’ 

The report explicitly acknowledged that pension scheme administrators are responsible for the day-to-day running of pension schemes. However, although it found that 13 administrators cover approximately 70% of the pension scheme members regulated by TPR, the regulator’s supervision team currently engages with just three on a voluntary basis. Starks described this level of engagement as an ‘unsatisfactory half-way house,’ which gives TPR only ‘partial coverage’ of the sector and ‘no hard powers to act if it has concerns.’ 

A case for formal regulation 

Starks went on to say that TPR views administrators as an important channel for oversight of the large number of smaller pension schemes. She added that, while industry consolidation may change the landscape over time, in her view the regulator will need to have ‘effective oversight’ of a large population of small schemes for the foreseeable future. As a result, Starks recommended that ‘DWP should assess the case for bringing administrators into formal regulation.’ 

Rather than formal regulation it may be better if both regulators and administrators engaged more regularly on an informal basis to discuss topics, concerns, and future changes to be aware of.

Regulatory oversight comes with additional costs. Administrators will need a clear timetable of what is to be regulated and when so that they can update processes and procedures, educate staff and incorporate these into contract renewal discussions with clients. 

Caution also needs to be taken; the regulator would be monitoring both parties who are also bound by contract, raising the question which takes priority; contract or regulator? Therefore, the regulator may also need to factor into any timetable the length of time for contracts to be updated.

Authorisation of professional trustees 

The review found there was also a case for considering authorisation for professional trustees. Starks noted that, while TPR does ‘encourage’ schemes to appoint at least one independent or professional trustee, it does not mandate this course of action unless it has ‘specific concerns’. She also highlighted the fact that there is currently no regulatory definition of a professional trustee and no hard regulatory requirements for becoming one, just a voluntary accreditation framework and a set of standards developed by industry representatives with TPR input. 

Considering the endgame 

Starks suggested this problem may ease as consolidation reduces the number of schemes in existence, although she also noted this consolidation may discourage people from qualifying as professional trustees if the market shrinks over time. She therefore concluded that the DWP and TPR should consider ‘the desirable ‘endgame’ pension industry structure’ and the trajectory for getting there when considering the case for introducing formal standards and authorisation for professional trustees. 

Pension management specialists 

EQ are pension management experts who specialise in delivering innovative retirement solutions on sensitive and highly complex projects. Providing support to pension scheme administrators, members, managers and trustees for over 187 years, our pension platforms support clients with all their pensions administration needs.