Coming together—FCA and TPR regulate defined contribution pensions

Lesley Harrold of Norton Rose Fulbright LLP discusses the code governing the new joint regulation of defined contribution pensions (DC) by the Pensions Regulator (TPR) and Financial Conduct Authority (FCA) and says joined-up regulation is essential in what is a time of dynamic change in the DC pensions world.

Original news

The Pensions Regulator and the FCA publish joint regulatory guide, LNB News 21/03/2014 66

A new guide that sets out how TPR and the FCA regulate DC workplace pensions has been launched. Aimed at trustees, advisers and pension providers, the new guide outlines each regulator’s approach, and how they work together to ensure consistency.

What is the respective remit of TPR and FCA when it comes to regulating workplace DC pensions?

There are two sorts of workplace DC pension schemes—trust-based and contract-based.

The regulation of occupational DC schemes is part of TPR’s remit, along with the regulation of occupational defined benefit (DB) schemes. An occupational scheme is established under trust by an employer (or a group of employers) and is administered by trustees, who may be either individual trustees, or a corporate trustee body. The trustees have a duty both to act, and to use any powers they have under the scheme’s trust deed and rules, in the best interest of the scheme’s members (beneficiaries).

The second type of DC pension scheme, a contract-based scheme, is regulated by the FCA, which recently superseded the Financial Services Authority (FSA), together with the Prudential Regulation Authority (PRA).

The FCA was established under the Financial Services and Markets Act 2000, Pt IA (FSMA 2000), and the PRA is governed by the same legislation. The PRA regulates financial institutions, including banks, building societies and insurers.

The FCA regulates:
• firms authorised under FSMA
• conduct in retail and wholesale financial markets
• supervises the trading infrastructure that supports retail and wholesale financial markets, and
• regulates firms not regulated by the PRA

The FCA regulates contract-based DC schemes which may be either group personal pension schemes (GPPs) or individual personal pensions. GPPs and personal pensions are essentially the same, in that they offer a tax-efficient pension savings vehicle under a contract between the member and the provider. A GPP is a number of personal pensions from the same provider which may be offered by an employer to its employees. Lower administration charges often apply due to economies of scale.

The fact that the two sorts of DC scheme (trust and contract-based) are regulated by two distinct bodies has been recognised as potentially problematic, and the regulators have been aware for some time of the need to further integrate their activities in order to discourage regulatory arbitrage (see below).

How does their approach to regulation differ from each other?

Although both TPR and the FCA have similar expectations for scheme quality and good pension outcomes for members, their regulatory focuses are slightly different. TPR’s focus is on trust-based schemes and the conduct of trustees—the FCA regulates a wide range of financial services and institutions and, as far as pensions are concerned, it operates to ensure that customers saving in contract-based pension products are treated fairly.

Given that, quite frequently, pension scheme members (and sometimes their employers) do not know whether they are saving in a trust-based or contract-based scheme, it is clearly desirable that the regulation of all DC schemes should operate as seamlessly as possible. There is no reason in principle why trust-based or contract-based schemes should deliver different outcomes for members. More joined-up regulation between the FCA and TPR has long been seen as desirable to build consumer confidence in both types of scheme. There is more emphasis than ever on fairness and building confidence in pension schemes now that larger numbers of people are saving in DC schemes than before, having been auto-enrolled.

Have they done enough to ensure a comparable level of supervision across contract-based schemes and trust-based schemes?

The guide and the statement that TPR and the FCA intend to work more closely together can be seen as a positive start rather than having ‘done enough’. It is early days for the two regulators’ joint approach, and no doubt the integrated focus will require fine tuning over time. There are still two regulatory regimes but evidence of ‘joined-up thinking’ is a very positive step, particularly as TPR and the FCA have already recognised that there was the potential for regulatory arbitrage under the previous, more separate, approach.

Arbitrage would occur where there was a notable disparity between the regulatory frameworks for trust-based and contract-based schemes, and employers sought to take advantage of the differences, leading to poorer pension outcomes for members. The guide states that the two regulators and the Government are to ‘actively work together to ensure that they identify regulatory arbitrage, manage it effectively and mitigate it where possible’.

While this is good news for scheme members, it is obviously too early to say exactly how the new joint initiative will operate in practice, and how effective it will be. However, the guide states that the FCA and TPR recognise that they have different strengths and will each take the lead on different kinds of regulatory activity, consistent with the remit, strategy and powers of each body. The two regulators also say that in situations where there are implications for both of them, they could undertake a joint investigation, which will avoid duplication of effort and should be more effective.

The Department for Work & Pensions (DWP) is also developing a framework of minimum quality standards in DC schemes, irrespective of whether they are trust-based or contract-based, which will further encourage a consistent approach. The DWP is intending to set benchmark requirements for scheme governance, investment design, administration and protection of scheme members.

What is the impact of the Joint Code on the pensions industry?

Joined-up regulation is essential in what is a time of dynamic change in the DC pensions world. In the new pensions landscape, the proposed liberation of draw-down announced in the Budget 2014 last week, and the ever-widening scope of auto-enrolment has put DC regulation at the forefront of government thinking. It is acknowledged by TPR that retirement savers have a right to expect their workplace pension scheme, whether trust- or contract-based, is well run and delivers a good pension outcome. The current recognition from the government, the FCA and TPR that there must be more interaction between them for a cohesive, effective regulatory approach to all DC pensions vehicles is to be achieved is welcome.

Interviewed by Dave Thorley.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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