UK - The UK's governance requirements for trust-based schemes are very high in relation to scheme size, leading industry experts to calls for the possible introduction of more 'proportionate' regulation.

A research paper comparing UK pensions regulation with the regimes in Australia, the USA, Germany, Ireland and the Netherlands and prepared by John Ashcroft for the National Association of Pension Funds (NAPF), suggests the UK is "out-of-step" with other countries in four key areas:

Defined Benefit (DB) inflation proofing DB employer covenant regulation DB and defined contribution (DC) governance requirements DC contract-based provision

The report revealed the UK's requirement of mandatory indexation of deferred pensions and pensions in payment are "out of step with international practice", as only Ireland requires indexation of deferred pensions, through revaluation, while Germany and Netherlands operate conditional indexation, and no revaluation or indexation rules apply to USA and Australia.

Findings also showed the UK also operates "more prescriptive" rules in other areas of DB regulations, including a three-month vesting period - compared to five years in Germany and 5-7 years in USA - and the absence to unilaterally transfer members with small balances out of the scheme unlike Ireland, the Netherlands and Australia.

On the issue of DC schemes, the report suggests the UK takes a "liberal approach" alongside Ireland and the USA, while the other countries in the study require either a guarantee, to target a certain level of benefits or to keep fees within certain limits.

However the research highlighted the biggest difference in the regulation of DC schemes across the represented countries is the "degree to which the fiduciary responsibility of the employer and scheme varies".

It stated no fiduciary responsibility applies to contract-based schemes in Ireland and group personal pensions (GPPs) in the UK, although it does apply in Netherlands, USA and Australia.

The results also revealed three regulatory approaches have been adopted between the six countries to secure members' benefits, with German book reserve schemes operating an 'employer protection' approach, while collective DC schemes in the Netherlands and funded schemes in Germany adopt a 'funding protection approach, while the remaining countries have a 'combined employer and funding protection'.

The NAPF report noted although the nature of regulation on professionalism of trustees and managers in the UK, Ireland and USA is "a little more general" than the other countries, it added these schemes are much smaller than the other group so "the governance requirements can be more onerous".

It pointed out the UK has 48,000 schemes with less than 100 members, but even in schemes with more than 100 members the average scheme size is around 2,600, which is a quarter of that in Germany and a tenth of that in Australia.

The report suggested "consideration should be given as to whether the UK's approach is sufficiently proportionate" and proposed one solution could be to make regulation "more proportionate to scheme size", or to reduce employer costs within a trust-based framework through a consolidation of pension provision, as has happened in the Netherlands and Australia.

In addition, the paper highlighted it may also be "worth reviewing the requirements" for fiduciary management of DC contract-based schemes, by requiring the use of default funds and introducing additional governance obligations such as management committees.

The report also identified that DB mandatory inflation proofing "makes the DB promise far more expensive than in other countries with comparable levels of benefit security", and by removing this it would also bring the UK in line with most other OECD countries, while abolishing mandatory indexation could lead to higher funding levels.

Nigel Peaple, NAPF director of policy said: "The study shows we need a more flexible approach for DB schemes, especially regarding indexation and the employer covenant. As for DC schemes we need to think carefully about how best to achieve high standards of governance over both trust based and contract based schemes. We hope the analysis will help promote informed discussion on how the regulatory framework in the UK should evolve in the future."

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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