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Author: Fiona Matthews

Complexity in pension governance: What does the future hold?

Across the pension industry, we have seen numerous changes to governance in recent years. Since the Pensions Act in 1993, regulation has steadily been ramped up. The most recent example is, of course, the onset of the freedoms and greater drawdown options in April 2015 and additional governance changes came into force for DC schemes at the same time. This additional regulation is inevitably having a significant impact on pension governance.

According to our recent survey of pension managers, the majority (61 percent) do not believe that governance changes of the last five years have resulted in improved outcomes for members. Instead, increased complexity has left pension managers and trustees stretched and unable to focus on what they think would be a better use of their time. We need to find a way to help change this imbalance.

Pension schemes are increasingly wanting to focus on the quality of members’ retirement, rather than risk management, but pension regulation is not reflecting this. To date, regulation has been mostly directed at compliance and managing risk, and 94 percent of pension managers predict that the complexity involved in these areas is set to increase.  Whilst auto enrolment was a big step towards improving provision for employees, most agree that it doesn’t go far enough to ensure individuals have adequate funds in place for their retirement.  This isn’t the best news for pension managers, who feel that by focussing on governance issues, they aren’t able to provide the best service possible to members.

Below, we look at the main concerns for the future of pension governance and how they can be addressed.

Regulatory change

Over half (53 percent) of pension managers believe that legislation and regulation are the main barriers to better governance. Our survey also revealed that spending less time on compliance and administration are major goals for managers. Increasing the complexity of pension governance, combined with limited resources within pension departments, will only make it harder for managers to focus on their priorities and achieve their goals.

The result of regulatory change should be to create good member outcomes, but right now it is having the opposite effect. Pension managers and trustees need help to move beyond the burdens of compliance and administration and instead focus on improving member outcomes.

Widening the net on default investment strategies

Since its introduction last April, drawdown has become hugely popular with members. Despite this, only 8 percent of scheme managers are targeting drawdown as their default investment strategy.

This is worrying, especially considering the fact that it has been nearly one year since the pension freedoms came into effect. It appears that although trustees recognise that members’ needs have dramatically changed as a result of the freedoms; they are struggling to put these changes into action.  One trend we have seen is for defaults that target a blend of potential retirement outcomes (cash, annuity and drawdown), but this could prove to be a solution that, in trying to do the right thing for everyone, ends up being not quite right for anyone.  Trustees could potentially find themselves needing to take another look at default strategies in 2016 if the new retirement options continue to grow in popularity.

So what does the future hold?

The outcome of a strong governance framework should be a better member experience and schemes being able to focus on what’s most important.  

Our research shows that schemes are keen to do this and move to a more strategic model, which will allow them to monitor members’ behaviour and help them at retirement.  However less than one in five feel they are currently able to prioritise this.

For those for whom the ever-increasing burden of governance crosses a tipping point, it is natural that an outsourced solution such as a master trust would be considered a viable means to address the issue. As well as looking after the day-to-day, high quality providers are better-equipped to tackle the challenges of providing value for money investment choices, communicating and demystifying complex issues and helping members better understand the choices that they’re making.

Over the next twelve months all eyes will be on master trust providers to see how they are fulfilling the promise that a strong governance framework can, with scale and expertise, lead to better member outcomes.