25/06/08 Pensions Governance: GPPs A Carrot and a Stick
25 June 2008
‘We’ve got a group personal pension plan. We pay our contributions and we deduct and pay across our employees’ contributions. We don’t need to do anything else’.
This was said to me by the CFO of a large company. I can understand why. For almost 20 years, contract based pension schemes and in particular group personal pensions (or GPPs), have been sold, in part, on the premise that they are ‘low maintenance’. No need for trustees, and so for trustee meetings, no need for an actuary to tell you how much to pay, no need for audited annual accounts. But was he right to say ‘we don’t need to do anything else’?
In this article I’ll explore the emerging regulatory stick and the improved profits carrot that may cause him to change his mind.
The stick: the regulatory imperative
The Pensions Regulator was established in April 2006 to replace the Occupational Pensions Regulatory Authority. This wasn’t, however, simply a change of name. The new regulator has different objectives, greater powers and a wider jurisdiction. In particular it has jurisdiction over ‘contract based’ pension schemes (which includes GPPs and Stakeholder schemes). It has the power to intervene in their governance if it finds that it is wanting.
It’s fair to say that the regulator hasn’t focused on contract based pension schemes to date, preferring instead to concentrate on final salary and other defined benefit schemes, but there is evidence that this is changing.
During the course of 2008 the regulator has issued a number of documents commenting on the governance of GPPs and other defined contribution and contract based schemes.
- On 9th May it issued the first of a series of guidance notes on good practice. This focused on retirement options and open market options. Later guides are planned to include communication with members and investment practice
- Also in May it issued a Q+A guide for employers (and others) in relation to governance
- On 24th April it issued its three year corporate plan. This lists four key objectives. One of these is to develop and implement an approach to regulation (in particular it wants to reduce risks to members) a second is to improve the governance of contract based pensions
- Also in April it issued a consultation report on the regulation of risks to members which it produced jointly with the Financial Services Authority
- In January it issued a ‘DC Update’ summarising the work that it has done to date and it’s plans for the future, as well as the findings of data gathering exercise. It identified a number of areas where it believed members’ benefits are at risk
- Also in January it issued Guidance on voluntary employer engagement with contract based pension schemes (which seemed to conclude that management committees may be the future)
Based on this and the proactive nature of this regulator, it seems reasonable to assume that they will soon be knocking on employers’ doors asking them to justify their role in the governance of their GPPs. Thus, there is a regulatory imperative to do more.
The carrot: improved profits?
There can, however, also be a benefit to employers in doing more.
Whenever a company invests in an asset, whether it’s a new site, a new member of staff or a new photocopier, it looks to the bottom line, ‘how will this benefit us?’ For some reason, though, companies don’t do this when they invest in employee benefits. Certainly, they could. Perhaps they should.
An employee benefit that is understood can be appreciated. An appreciated employee benefit will lead to more satisfied staff that are better motivated. Better motivated staff are more productive and less likely to leave (reducing recruitment costs). As the company grows, a well governed employee benefit package will make it more attractive, thus reducing recruitment difficulty and costs.
These can all add measurably to the bottom line because, for example, the cost of replacing one member of staff on average earnings of around £25,000 can easily come close to £20,000 if you include lost productivity before leaving, reduced productivity and training in the first year of a new recruit along with hiring costs.
An active approach to governance means that members will understand and appreciate what they have. They should appreciate how hard their employer is working to help them to build assets for the future.
Conclusions?
It is only a matter of time before the regulator uses their stick. The sensible course of action, to mitigate the consequences of that and to generate those extra profits, would seem to be ‘we do need to do something else’. Now.
From The Thames Valley Business Magazine (July/August 2008)