Some pension schemes need more regulation

The pensions watchdog needs step up regulation of defined-contribution pension schemes and raise governance standards at many schemes, a parliamentary committee said on Thursday.

The Pensions Regulator has so far made good progress in regulating defined benefit, also known as final salary, pension schemes, but has been slow in developing an oversight approach to defined contribution, or money purchase, schemes, the parliament's Public Accounts Committee said in a report.

The regulator must get more comprehensive information on the financial situation of defined-contribution schemes, in order to identify and concentrate its attention on those schemes that present the highest risk of collapse, the influential committee's report said.

The regulator should also work closely with the financial markets regulator, the Financial Services Authority, to improve the understanding of members of defined-contribution schemes of the risks they face, the committee recommended.

The watchdogs should review whether defined contribution schemes give sufficient warnings to their members that the money they put aside in their scheme may not offer them a reasonable income in retirement, the report said.

But the Confederation of British Industry said the Pensions Regulator should not take the lead in this area.

"It should work with the Financial Services Authority, the insurance industry and employers to ensure there is appropriate communication with scheme members so they are aware of the nature and risks of their pension investment," Susan Anderson, CBI director of human resources said.

Defined benefit schemes guarantee members an income equivalent to a proportion of their final salary at retirement. But many firms have closed these schemes in favour of less lucrative defined-contribution schemes, which generally involve smaller employer contributions and where members bear all the investment risk.

The parliamentary group also found governance levels at pension schemes remain low, despite the regulator having set out conduct standards. This is particularly the case in defined-contribution schemes and smaller defined-benefit schemes.

The regulator should do more to improve governance levels and make clear what its ultimate goal is for how schemes should be run, the committee said.