Contract, trust-based funds must be held to 'equal' standards – NAPF

UK – The introduction of minimum standards for UK defined contribution (DC) funds could fail to establish a regulatory framework that applies equally to contract and trust-based pension provision, the National Association of Pension Funds (NAPF) has warned.

Responding to a consultation by the Department for Work & Pensions (DWP), the organisation also warned that the proposed minimum standards would be insufficient to prevent members from suffering worse outcomes as a result of pensions minister Steve Webb's proposals for a 'pot follows member' consolidation system.

It noted that, regardless of mandatory minimum requirements, there would still be differences within the DC market allowing members to be transferred "from an excellent scheme into a mediocre one".

"Furthermore," the organisation's response says, "transferring members' entire savings whenever they move jobs exposes them to substantial market risks."

The NAPF has previously spoken in favour of a limited number of schemes being selected as central aggregators, receiving all pots deemed dormant.

It also welcomed that both contract-based providers, run by insurance companies, and trust-based funds would be held to "equal" standards, as it believes certain contract-based arrangements lack any kind of governance arrangement.

Darren Philp, director of policy at the organisation, said: "There is an inherent governance vacuum in contract-based schemes, but the situation is not unmanageable – there are many excellent contract-based schemes where the employer steps up and takes responsibility for governance.

"It makes sense that governance sits at employer-level in these scheme."

The NAPF also warned that introducing a requirement for contract-based schemes to be more aligned with member interests could prove problematic.

"Trustees have a fiduciary duty to uphold members' interests," it noted, "but there are a different set of duties that apply to providers of contract-based schemes."

It noted that insurers were ultimately responsible to shareholders and restricted by the limitations of contract law, under which the arrangements were offered.

"Placing trustee-style duties on providers of contract-based schemes is challenging, and there is a potential for conflicts of interest," it said.

Later in its response, the NAPF added: "There is also a risk these proposals will fail to establish an equal regulatory landscape that covers both contract-based and trust-based schemes."

It said contract-based arrangements could be seen as "inappropriate" if used for the automatic enrolment of an unengaged company with no previous experience in pensions.

The comments echo those made by Craig Berry, until recently pensions policy officer at the union umbrella group TUC, earlier this year.