UK - The Financial Services Authority (FSA) has published a paper seeking to evaluate pension regulation in the UK against the background of economic and financial theory, as well as ‘best practice' as seen from the standpoint of global experience.
The FSA says the UK pension system is worthy of attention internationally given the success of funded pensions (both occupational and personal)in terms of high coverage of the labour force on a voluntary basis,large asset size and good investment performance, combined with the low level of unfunded social security pension.
Indeed,it is suggested that the UK can offer some positive lessons to other countries wishing to undertake pension reforms boosting the role of funding.
But equally,some of the well-known failures of the UK regime, according to the FSA, may give some warnings about the pitfalls that can arise from inadequacies in regulation.
The regulator said this applies particularly to the Maxwell fraud scandal as well as high commission levels, low levels of contributions and mis-selling of personal pensions by insurance companies.
In the paper, the FSA asserts that insurance of pension funds solely against losses due to fraud “seems a sensible way to avoid adverse incentive problems that wider insurance may generate.”
The FSA also says the pensions regulatory structure remains unwieldy,with several statutory bodies jointly responsible for it. In addition, the frequency of change in pension regulations is another weakness.
The paper continues: “As regards occupational defined benefit funds in the UK, regulations historically tended to provide a rough balance between costs for the sponsor and protection of the beneficiary. But costs to sponsors arising from regulation have risen sharply in recent years, owing in particular to the minimum funding requirement as well as compulsory indexation of pensions. This is one of the factors leading companies to abandon or wind up defined benefit funds,which may not be a desirable outcome.
“Outstanding regulatory issues for occupational defined benefit funds include controls on internal transfers, as well as the incentive to early retirement arising from increased accruals as retirement approaches,which may distort the labour market. Also,it would be desirable for ‘portability’ losses arising when individuals shift between funds to be further reduced.”
On the defined contribution side,in the view of the author E Philip Davis, of Brunel University, a problem that has not been addressed by regulation is the low level of contributions to such plans ... stakeholder pensions can remedy these problems.”
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