Auto enrolment pensions: lack of protection for employees

Plans to establish an effective regulatory framework to govern workplace pensions are only in the early stages but on initial inspection fail to offer adequate protection for employees, warns Brendan Shanks, CEO of Husky Finance

Regulation is good. Although illogical to some, effective regulation protects and inspires trust, particularly for the mass-market user. The seismic change in pension provision over recent years, as smaller and smaller employers are required to provide workplace pensions to their workers, makes sense. Get more people to save for their retirement and they rely less on an overstretched state.

But asking workers to sacrifice part of their monthly pay-check, and businesses to divert profits as a supplement, is tough to accept if neither party has confidence in where their money is being placed.

Both employer and employee expect pension savings to be secure, but most small employers have little idea or experience of choosing a good pension. Effective oversight can give everyone comfort.

There is a need to tighten the workplace pensions framework, particularly in light of the paucity of regulation and lack of a robust voluntary system, which risks significantly undermining the objective of the pension changes. Some remedies being suggested though might not go far enough and they could add confusion to a system that is already too complex for most.

Building any effective regulatory framework is fiendishly difficult. Effective oversight of workplace pensions is no different.  Already, there is the question of whether a voluntary or mandatory system is best. The objective is clear though: small employers must be provided with better signposting and helped to make an informed choice of scheme.

Building any effective regulatory framework is fiendishly difficult. Effective oversight of workplace pensions is no different

A strong regulatory body carries more force, but can get caught up in argument if perceived to be out-of-touch with practical reality, while a voluntary code can become conflicted as rules are softened to fit business needs. Overall, it needs to be simple and easily understood by all those it seeks to protect, and at all levels of financial knowledge.

To achieve this, at the core of a secure workplace pensions regulatory framework is that proper assessment of schemes needs to cover more than one aspect. A good scheme must be viable in having enough assets to survive long-term on the thin margins, transparent in the way that it sets charges and manages money, and well-run by knowledgeable, experienced and honest people.

Whether a voluntary or mandatory system is best can be debated but, overall, it needs to be simple and easily understood by all those it seeks to protect, and at all levels of financial knowledge.

Weak governance

How is it sufficient, therefore, to consider only the way that the scheme is governed, as The Pension Regulator’s master trust assurance framework (MAF) does? This ignores issues such a pension’s financial strength or membership protection should the scheme have to be dissolved. Regular governance meetings do not guarantee expertise and there may be concerns around transparency.

Expanding the group personal pensions (GPP) framework to capture auto enrolment requirements is also insufficient. The requirement for independent governing oversight and registration with the Financial Conduct Authority or Prudential Regulation Authority may reduce the risk of dishonest operators, but questions over long-term viability and scheme transparency would remain unanswered.

The Pensions Bill proposed in the Queen’s speech in May leaves small employers asking questions. How long will all this take? Small employers cannot duck their staging dates. They must establish a scheme irrespective of legislative timings. So where in the meantime do they go for guidance to help them to choose a good scheme? How many of the providers currently on the The Pensions Regulator’s website would actually meet the stricter criteria?

Will the legislation give adequate protection over capital adequacy and wind-down protection, that fit and proper people are operating the schemes, that charges are fair and transparent rather than hidden away in complexity, or that unfair sales exaggeration is being curtailed?

Small employers, and their workers who benefit from such protections, need answers now, not in late 2017.

What is more, even with an effective, regulatory system of regulation, it should not replace the need for small employers to conduct their own analysis of potential pension schemes and match their needs accordingly. For while regulation is good and necessary, true protection only comes with complete understanding.

About the author

Brendan Shanks is CEO of workplace pension service Husky Finance

Brendan Shanks |CEO, Husky Finance

Brendan Shanks is CEO, Husky Finance, a workplace pension provider, and has more than...

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