UK - Consultants have warned against over-regulation of defined contribution (DC) schemes, following criticism of The Pensions Regulator's (TPR) existing approach by the House of Commons Public Accounts Committee.

In its report, the Public Accounts Committee noted TPR only has information on 32% of money purchase pension schemes, compared to 99% of defined benefit (DB) schemes, and suggested governance standards "remain low in many pension schemes" particularly among DC and smaller schemes.

The final report also recommended TPR should review the "adequacy" of the information provided to members of DC schemes, as it claimed "a lack of understanding amongst members is a key risk" to workers in money purchase schemes and argued "TPR has done little to generate improvements".

However, Watson Wyatt said the recommendations for TPR to target its efforts at DC schemes "should be treated with a degree of caution", as it claimed over-regulation has been "one of the prime causes of the demise of many private sector DB schemes".

Paul Macro, senior consultant at Watson Wyatt, said: "Members need to understand the risks involved with DC pensions, and employers, trustees and pension providers need to play their part in designing schemes that enable members to understand and address these risks.

"But in the same way the tightening regulation of DB pensions accelerated their closure it is important that employers are not put off from providing DC pensions that offer more than the statutory minimum," he added.

Meanwhile, Helen Dowsey, principal in the benefit solutions division at Aon Consulting, suggested the committee had been "rather severe" on TPR by saying it has been "inactive in its overseeing of money purchase schemes".

On the contrary, Dowsey pointed out over the last 18 months or so TPR has issued a series of documents specifically addressing the risks facing members of DC pensions, including five areas of risk which have been highlighted as a future focus in TPR's latest corporate plan. (See earlier IPE story: Improving DC governance is key TPR target)

She added: "The guidance from the Regulator states that employers and others involved in operating DC plans should be looking at how to mitigate the risk to members and how to educate members to understand the risks of investing in different asset classes. This, together with clear advice about engaging them to review which funds they invest in, is a key part of the guidance."

However, Watson Wyatt pointed out the issue of DC governance is likely to become more important as up to 10 million people will be auto-enrolled into personal accounts - effectively a large trust-based DC scheme - from 2012, and the "vast majority" are "unlikely to understand investment and pensions and the risks involved".

Macro said: "Good design, governance and communication is vital for DC schemes and the committee is right to highlight this. Pensions scheme members need to be engaged to have any chance of understanding the important risks and choices they face."

He added: "This requires thought and imagination over the design and communication on the part of employers, trustees and providers to produce an arrangement suitable for the relevant group of employees; something which the blunt tool of regulation all too often stifles. We hope that TPR continues to bear this in mind as it encourages best practice in DC pensions."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com.

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