New research shows the “unacceptable” scale of under-performance in small pension schemes, highlighting why they must improve or leave the market to protect savers.
The annual defined contribution (DC) survey report, published by The Pensions Regulator (TPR) today, also reveals that larger pension schemes, such as authorised master trusts, are more likely to be run well and provide good value for members.
Almost three quarters of savers (71%) are in pension schemes which are meeting all of the expected governance standards, an increase from 54% of savers in 2018 and 32% in 2017. Generally, the extent to which schemes meet governance standards increases with scheme size.
Most smaller schemes fail to meet standards of governance and trusteeship, with only 4% of micro schemes (which have between 2 and 11 members) and 1% of small schemes (which have between 12 and 99 members) meeting all of the governance standards.
David Fairs, Executive Director for Regulatory Policy, Analysis and Advice at TPR, said: “These figures clearly show that people saving for their retirement are generally far better served by big schemes than small.
“This long tail of smaller schemes which do not meet the standards we expect is simply unacceptable.
“This research highlights why our current Future of Trusteeship and Governance consultation is so important. We need to reduce the number of poorly run schemes so that no saver’s retirement is put at risk by bad scheme governance.
“All trustees – of pension schemes big and small – should be taking their role tremendously seriously and ensuring that they are running their scheme properly so savers get a good retirement.”
The survey also shows that the trustees of 43% of small schemes have considered winding up. However, those schemes were more likely to meet the required standards than schemes of the same size that have not considered winding up.
Mr Fairs said: “The statistics clearly show that those trustees which are running small schemes to a comparatively higher standard are trying to do the right thing for their savers by winding up. They recognise that savers will generally get better value in a larger, better-run scheme which can benefit from economies of scale.
“The most disengaged trustees are blissfully unaware that they are failing savers by not running their schemes properly.”
The survey also found:
- Only 20% of schemes take climate change into account when considering their investment approach. From October 2019, every Statement of Investment Principles must include the trustees’ policies on how they consider Environmental, Social and Governance (ESG) factors, which includes climate change, in their investment strategy.
- Two-thirds of trustees directly contacted by TPR went on to spend more time on a scheme’s governance and administration. TPR’s regulatory initiatives are working to contact more small schemes with a more directive style of communication, clarifying priorities and providing ‘simple steps’ for complying with the fundamentals of good governance.
- Three-quarters of schemes reported they have more than half of the cyber security controls expected by TPR in place. Cyber security is not just about reducing the risk of incidents occurring, but also preparing in case things go wrong with an incident response plan and contingencies. TPR has published guidance for schemes about cyber security.
Notes for editors
1. The DC Survey measures schemes against five areas, dubbed Key Governance Requirements (KGR):
- KGR1: Trustee boards must possess or have access to the knowledge and competencies necessary to properly run the scheme
- KGR2: Trustee boards must assess the extent to which charges / transaction costs provide good value for members
- KGR3: Core scheme financial transactions must be processed promptly and accurately
- KGR4: Trustees of master trusts must meet independence requirements (applicable only to master trusts)
- KGR5: Trustee boards must ensure the default investment strategy is suitably designed for their members (applicable only to schemes with a default investment strategy)
2. A total of 447 interviews were completed as part of the 2019 DC Survey, made up of 430 single-employer schemes and 17 master trusts. The sample consisted of: micro schemes (2 to 11 members); small schemes (12 to 99 members); medium schemes (100 to 999 members); large schemes (1,000 or more members); and master trusts. The sample included hybrid schemes as well as open, closed and paid up schemes, but those in the process of winding up or which had wound up were excluded. Small self-administered schemes (SSAS) and executive pension plans (EPPs) which are exempt from a number of governance requirements were also excluded.
3. TPR is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of TPR’s functions under Part 3 of the Pensions Act 2004 only).