Key speechesExpectations of the regulator, expectations of the industry

Tony Hobman, chief executive, speaking at OPDU
March 2010
 
It’s always a pleasure to speak at an OPDU event since I know I’m going to have a very informed and engaged audience and that if i do spot anyone nodding off – it’ll simply be the result of genuine work-related fatigue rather than the effects of 20 minutes worth of pensions-regulation so soon after lunch.

I’m certainly working with the snappiest title of any presentation I’ve ever been asked to give and actually I think it’s a pretty opportune time for me to be talking about expectations since the team in Brighton is putting the finishing touches to our 2010 corporate plan, which sets out our expectations of ourselves for the year ahead.

And I’ll talk a little more in a moment about what you can expect from us, but first of all I’d like to focus on what we do ask will continue to ask of you…after all it’s your hard work and your interpretation of our expectations that has such an important impact on the pensions landscape that we all work in.

The economic downturn has seen many of the challenges and risks facing the industry gain visibility and significance well beyond the confines of the traditional pensions market.

Pension funds and the actions of scheme trustees have attracted much greater scrutiny, and discussions in industry as well as some high profile media reporting has brought particular attention to issues such as DB funding, and the relevance and importance of the employer covenant

Dealing with risk has always been an essential component of the trustee role, but events of the last year or so have shown us that we all have to be ready to adapt quickly to a market that can change at short notice, and to deal with the challenges and risks that will inevitably arise.

But even with this is mind we still need to retain an appropriate focus on existing and established risks, as well as finding ways to minimise the potential impact of those that we may face in the future.

We’ve spent much of the last year setting out our regulatory expectations – making clear what we believe is best practice in a number of key areas – and offering support and guidance to everyone involved in running pension schemes now, as well, of course as looking forward to those challenges that lie ahead.

Back in October of 2008, we set out our stall on db funding in the context of tougher economic conditions – highlighting the importance of flexibility and co-operation. This was in recognition of and response to the extra pressure on both schemes and trustees during the downturn as well as the additional constraints on corporate cash flows and the impact on employer covenants in general.

Our expectation was, and still is, that sponsors and trustees need to reach a place where they can agree on funding plans that are reasonably affordable for the employer, but that also maintain a strong focus on member benefits.

A wholly legitimate expectation of our regulated community was of course that we should display some flexibility of approach too.

The strongest call was probably for a lengthening of the 10 year recovery plan trigger, forcing us to reiterate once again that it is an operational tool for us and not a target for trustees to aim at.

The trigger helps us to consider when it might be appropriate for us to investigate a recovery plan further and this has always been the case. We have a comprehensive risk assessment process which takes into account a whole range of factors and we look at each scheme as an individual entity and judge each case on its own merits.

Now I know you have heard my colleagues in Brighton and I say all of this many times before but I think it really does bear repetition and, equally, I make no apology for reminding you again that to date we have considered and agreed recovery plans from less than 1 year to more than 20 years. Each of these was appropriate for the individual circumstances of the scheme and the employer.

To reinforce the key messages of our 2009 DB campaign, and to be transparent about the processes we expect schemes to go through and what questions should be asked, we held workshops across the country last summer. Indeed some of you may well have attended one of them. These provided participants with an opportunity to work through practical examples of situations such as setting funding targets, agreeing recovery plans and dealing with de-risking proposals.

And of course it is inevitable that the tough economic climate has fuelled the level of activity in the de-risking and liability management markets. I can only repeat a familiar, but I can assure you, heartfelt refrain that from a regulatory standpoint we do welcome innovation in the marketplace and we do recognise the potential for such products. What we stress equally however, is the importance of trustees really understanding the products they may be buying and being clear about the potential impact of their actions on members’ benefits.

However, whilst we have and do continue to recognise the difficulties facing schemes and sponsors, the legitimate interests of members cannot be swept under the rug, through - for example - an inappropriate weakening of technical provisions.

This helps neither sponsor nor scheme in the long run.

In the second half of 2009 we shifted the focus of our messaging and guidance onto DC, setting out what we expect from both trustees and employers who have such schemes.

We made it clear that DC members need support that reflects the higher level of individual financial risk they face than their db counterparts. And that this matters throughout their time in the scheme - but particularly when they are approaching retirement, and have important and often complex decisions to make about how and when they turn their pension savings into an income.

And the economic situation has inevitably heightened this need – as many dc members approaching retirement have had to face the tough reality that their savings may be worth less than they had expected.

We backed our messaging with practical information for schemes to give members in that critical pre-retirement phase, when they are making important decisions about their retirement income – such as choosing the open market option, deferring purchasing an annuity, or taking income drawdown. And I have to say that given the very high download volumes from our website, we were very encouraged indeed by the number of trustees who are evidently keen to ensure that they are offering good value to their members.

Following a review of the literature currently being sent to members approaching retirement, we have also been clear that we expect to see all such communications adhering to legislative requirements - and that our thoughts on good practice suggest that this should be viewed as a floor rather than a ceiling.

Most recently, we have focused our messaging and guidance around best practice in scheme governance and the basic building blocks of a well run scheme, such as record-keeping and internal controls, which are key in militating against scheme risk.

But let me just take a minute to step back and look at some basic principles – which we set out during our current governance campaign – and which underpin the running of all schemes.

The safe management of member benefits relies on a whole series of factors, but there are three key principles that we think will help trustees and employers to reduce the impact of the risks facing their scheme.

These could be summed up as:

• The right skills and knowledge
• The right people, and
• The right processes.

To put these even more firmly in a scheme context, we are saying:

• That everyone involved in the everyday running of the scheme must have sufficient knowledge and the right skills to carry out their role to the highest standard
• That the right people are employed to advise and help trustees to manage the scheme;
• And, that sufficient processes are in place to make sure that if things do go wrong, the problem can be dealt with quickly in the short term. And that processes are put in place to reduce the risk of the same issue arising again.

Clearly this is highly relevant to db schemes, where it is important to be confident - for example – that all trustees have appropriate knowledge and understanding of the scheme and the employer; that the right people are available to provide advice and support on funding decisions; and that processes are in place to deal with issues such as potential conflicts of interest within the trustee board.

But of course it applies equally to dc schemes where trustees need to be sure they understand their responsibilities around providing information and support to members; that processes are in place to capture and store member records; and that trustees have the right knowledge about a scheme’s investments - and that they know who is responsible for taking everyday decisions about fund choices and potential new investment strategies.

Now, I don’t suggest that any of this is easy – we know that the environment you are working in is complex and that being an engaged and informed trustee requires dedication and effort. And we are certainly fortunate in the UK that so many tens of thousands of individuals are prepared to give up their time to oversee the running and management of workplace pensions.

And because we have made it clear that we do want to see the highest possible standards in the running of schemes, we are increasingly focused on offering practical support and guidance in key areas, such as governance.

Which brings me back to our current campaign - where over the last few months, we have set out our expectations in two areas in particular - internal controls - and record-keeping.

Having robust internal controls will mean that processes are in place to identify and manage scheme risk - and that any issues that do arise can be dealt with quickly and effectively.

Our updated guidance – which we published in December - has not substantially changed, but in the light of our commitment to providing even greater practical support and clarity, it does feature more case studies and examples of good practice.

We recognise that in particular that smaller schemes may feel they are under greater pressure when trying to meet our expectations, given that in the main there is less resource available - both human and financial. So, to help trustees of smaller schemes, the revised guidance does pay specific attention to what they can do to make sure that appropriate processes are in place.

Turning now to record keeping.

We have long been focused on encouraging better practice in the collection and storage of member data, however, despite publishing initial record-keeping guidance last year – we now know that barely 1 in 5 of the schemes that we have monitored have checked they have all the fundamental common data they need. And that of these, over half appeared to be missing more than one item of common data.

So - in response to this clearly unsatisfactory situation, we have set out our proposed expectations in our updated guidance – which is currently out for consultation.

In the revised guidance we are specifying what core data - which is the basic data all schemes need to hold about their members, for example, name, date of birth, and date of joining the scheme - must be collected and stored by schemes.

We are also proposing precise targets for the accuracy of that data.

The setting of targets is a new step for us but we feel that record-keeping is so vital to the effective running of all schemes, that we must take steps to make sure appropriate standards are met.

Our proposal is that for all common data - collected from 2010 onwards - we would expect to see 100 per cent accuracy.

And for legacy common data, we want to see all schemes reach the highest possible levels of accuracy by the end of 2012. Certainly aiming for 100% also.

We have also said that all schemes will be expected to meet these targets and should they fall short - have a plan in place – as part of their internal controls – to rectify the situation.

As i’m sure you will all know, we have always approached regulation with a primary focus on education and enablement - using our enforcement powers only where necessary.

And this certainly remains the case.

But given the significance of good record-keeping to even the most basic of scheme activities, we have also highlighted in our consultation that we will consider the use our enforcement powers if schemes do not adhere to the guidelines.

Although of course we hope that schemes will recognise the importance of having good records, meaning that we do not reach a stage whereby we need to take such regulatory action.

To help further explain our expectations and give trustees and employers an opportunity to consider what best practice in governance looks like, we are also currently carrying out a series of national workshops.

So far we have visited Edinburgh and London, and next week the series will end in Nottingham.

Certainly, the London and Edinburgh workshops were packed to the rafters and at the first Edinburgh event a number of people even arrived unannounced to see if they could get a place.

I think this simply highlights just what a vital and core issue governance is and just how keen so many trustees are to engage with the issue.

Likened by some of my colleagues to hidden rocks beneath choppy water, poor governance sits at the root of many basic problems that arise in schemes. So, unlike issues such as db funding, where warning signs may flag up problems in a fairly short time scale, trustees often don’t see governance issues coming until it’s too late.

So the aim of the workshops, as with our wider guidance, has been to get trustees, employers and professional advisers thinking about the practicalities of good governance – and to encourage them to go back to their schemes and to take action wherever necessary – by putting appropriate internal controls in place, measuring and cleansing their member data and creating and using risk registers as a living tool to help them raise issues that affect both scheme and sponsor, rather than simply as a tick-box exercise.

If you weren’t able to attend any of our workshops, I would urge you to visit our website to find out more about our thoughts on good governance – and to look at our dedicated pages for DB and DC trustees – or employers - to find out more.

And if you have questions, or concerns about your scheme, you can of course contact us and we’ll do everything we can to help.

Now, I am conscious that I said at the beginning that I would give you an idea of what you can expect from the regulator in 2010 and beyond.

Well, firstly I can assure you that we will maintain our interest in getting scheme basics right - and we will continue to focus our attention on helping all those involved in running and managing pension schemes to understand the importance of having the right skills, the right people and the right processes in place.

But we will also continue to pay specific attention to the individual and unique needs of those managing DB and DC schemes.

Our priority for DB schemes will remain that trustees set appropriate funding targets, and agree with employers that any deficit is filled as quickly as is reasonably possible.

We intend to provide further help and support to trustees on the issue of covenant this year and we will continue to focus on ensuring that pension schemes are treated fairly within corporate activity – be they closed or open.

And following on from our messaging at the end of 2009, we will broaden and deepen our focus on de-risking strategies – making sure that members’ benefits are always a key priority.

There are still over 8 million DB scheme memberships and there remains a huge volume of assets in DB schemes. Members will be entitled to their benefits for many years to come and so, in turn, we will remain committed to supporting those who run DB schemes and to ensuring that those members’ benefits are protected for as long as they have to be, into the future.

You can also expect to see us maintain our strong focus on DC - as that part of the market continues to grow – and in particular as we approach 2012 and the advent of auto-enrolment.

This means that we will be paying considerable attention to the risks facing DC scheme members - and working to understand and clarify the roles, responsibilities and accountabilities of the various parties who need to work together to make DC a safe and secure environment into which members can save for their retirement.

And speaking of 2012, our work on designing and developing the regulatory regime for auto-enrolment will of course also continue to be a hugely important component of our workplans

We fully recognise the impact that the 2012 reforms will have on all employers but most especially on smaller businesses who have not previously chosen to get involved in pension provision, nor have had a relationship with the regulator.

We also know that employers and providers alike will need time to build the necessary changes into their future business planning.

And we know from the research that we have conducted over the last year or so that when faced with new legislation, employers turn to intermediaries to help them understand what they have to do. So, next near we will make sure that the widest range of intermediary bodies have the information they need to offer that support.

In the coming months we will be refreshing our website to provide simple, straightforward information about the employer duties - and generating communications which will be aimed specifically at employers – which will set out our expectations around what they could be doing now to prepare for auto-enrolment.

And later in the year we will be publicly consulting on our proposed enforcement strategy, which will give employers and the industry an opportunity to feed into our approach.

We all, in our different ways, have had to face the challenging effects of the difficult economic climate.

And the year ahead, I’m sure, will continue to be a very busy time for the regulator and for those we regulate.

So i would just like to conclude by saying that your expectations of us over the next year - and beyond – can be that we will continue to engage and work closely with you - our regulated community and that we will maintain our risk-based approach to our work and our strong commitment to the principles of better regulation.

We will remain focused on education and enablement - though we have made it clear that we will use our powers where necessary – and we will do everything we can to support and provide you with the guidance you need to meet our expectations of you that you continue to carry out your roles to the highest possible standards and that between us we work to ensure the ongoing success of UK workplace pensions, whatever form they may take.

Thank you