The creation of a single regulator for the occupational pensions market is both inevitable and necessary, according to the outgoing chairman of the National Association of Pensions Funds (NAPF), Mark Hyde Harrison.
As part of his welcome speech at the NAPF Conference and Exhibition 2013, he said that the pensions industry’s current regulatory framework, split between two regulatory bodies, constituted a serious flaw.
“The mass [defined contribution] DC market, brought about by auto-enrolment, will mean that the current regulatory split of the market, between The Pensions Regulator and the Financial Conduct Authority, will become increasingly apparent and increasingly unsustainable in my view.
“With pensions becoming an employer duty, and with the growth in the number of pensions, it can only be a matter of time before we move to a single regulator for occupational pensions.”
Hyde Harrison called for the pensions industry to have an open debate about the creation of a single occupational pensions industry regulator, but acknowledged the challenges involved.
“It won’t be easy, I recognise that, but it doesn’t mean we should dodge the issue. If we want fairer pensions and better pensions, then we have to tackle the difficult issues. The right regulatory framework is one ingredient for ensuring that we have sustainable pensions.”
Regulation number one challenge
Regulation was one of a number of challenges that Hyde Harrison said the pensions industry faces in the next 20 years, along with the shape of pension schemes and the political environment in which changes take place.
He acknowledged the success of auto-enrolment, which he said would enrol nine million new savers in pensions.
To date, 1.6 million employees have been auto-enrolled and by the next general election, 4.3 million employees across 50,000 employers would have been opted into their organisation’s workplace pension scheme, according to NAPF figures.
But he warned that pension scheme quality was key to the continued success of the new pensions regime. “If we want to take the bold step of making people save, then we must take the responsibility of ensuring that people are saving in good schemes, not any old schemes.”
He added: “Auto-enrolment is going well so far, but the big test will be the next tranches of smaller employers that will follow.”
Pressure from quantitive easing
But he said that in the meantime, UK pension schemes faced significant pressure from future tranches of quantitative easing (QE). The NAPF has calculated that QE has to date added about £90 billion to the cost of pension scheme deficits.
Hyde Harrison added that the threat of new solvency rules for defined benefit (DB) pension schemes was exacerbating UK pension schemes’ challenges.
The European Commission’s Institutions for Occupational Retirement Provision directive is the prudential regulatory framework for workplace pension schemes, introduced in 2003, to which the body’s internal market and services commissioner, Michel Barnier, wants to reform to introduce a requirement for employers to hold additional funding against their pension schemes by way of a capital buffer. But the proposal is currently on hold.
Hyde Harrison said: “Threat is a word that can be bandied around pretty liberally in settings like this, but I think here it’s no unjust statement. The cost of these new rules, built around an holistic balance sheet, would have added around £150 billion to the costs of UK DB schemes. That’s a cost that no pension system could, or should, have to bear.”
He added: “The commission believes these rules would enhance the security, sustainability and adequacy of pensions across Europe. I believe it would do precisely the opposite and I know that many of you do, too.
“So we cannot be complacent: we must continue to work together to oppose these damaging rules.”