What the regulator expects of trustees
Speech - Bill Galvin
NAPF Trustee Conference
December 2011
Good afternoon and welcome. It’s a pleasure to be here and I’d like to thank Joanne and Mark for giving the regulator the opportunity once again to address this important event.
The fact that today we have heard about such a range of different subjects – from de-risking and derivatives to default funds and DC is a clear sign of the variety of issues and challenges facing the pensions industry, and which directly affect all of you as trustees. Not to mention automatic enrolment and the challenges facing trustees and employers alike.
It is encouraging that despite the increasing complexity of the trustee role very many schemes continue to offer an environment where members’ savings are safe and well-managed. And very many trustees continue to carry out their role to a very high standard.
However there is always room for improvement and as the landscape in which we all work changes over the coming years we must be ready to change with it, and to up our game to make sure that every member of an occupational pension scheme feels confident about the way their pension savings are being managed.
This is an important time for the whole pensions industry, including trustees, to take stock and to make sure that they are equipped to carry out their role with confidence.
It is also an important time for us to look at how we help trustees - and employers and the advisory community - to gain a clearer understanding of our expectations.
Over the coming year you will hear more from us about how we believe trustees can help to build a stronger and more sustainable pension system. Today I will set out just a few of the challenges and how we would like to see trustees react to those situations.
But before I do, it’s worth recapping on some of the regulator’s priority areas:
Firstly, to continue to improve the position of defined benefit (DB) schemes
Secondly, to work with the industry to support a uniformly high standard of defined contribution (DC) provision
And thirdly, to ensure maximum compliance by employers with the new automatic enrolment duties.
It’s vital that we maintain a sharp focus on these key areas so that members are protected and are enabled to receive the best possible savings outcome at retirement.
We know that we need the support of the pensions industry if we are to succeed and that trustees are vital to supporting our work in each of these areas. Not only do trustees play a central role in assessing and managing risk, you also ensure that schemes are governed effectively over the long term. And in the coming years you will also be an important source of support to both employers and members, as they get to grips with automatic enrolment.
Roundup of challenges for DB schemes
At the NAPF annual conference in October this year, our Chairman Michael O’Higgins spoke about our approach, going forward, to regulating DB schemes, so today I will focus much of my attention on our work around DC schemes.
However I would like to just briefly reflect on some of those challenges again today. In particular the ongoing financial pressures facing schemes and sponsoring employers.
In addition to the long-term issues of rising longevity and uncertain investment returns, responses to the domestic recession and problems in the Eurozone have led to historically low interest rates and gilt yields - increasing liabilities and deficits.
As the NAPF has emphasised, quantitative easing (QE) may have a similar effect for a period, although - we all hope - at the same time helping to stimulate growth in the economy more generally.
This is undeniably a difficult time for everyone involved with DB pensions, and whilst we cannot know precisely what the economy has in store for us all, we can be confident that our funding framework is robust and flexible enough to support schemes through valuations in these challenging economic circumstances.
Within the next 6 months almost a third of schemes will reach their next valuation date. To help these trustees to fully understand their role at these important dates, in spring next year we will give a clear steer on what we think are acceptable approaches to funding and recovery plans given prevailing economic circumstances.
In the meantime I would however draw your attention to the statements we published in 2008 and 2009, when the UK economy last faced a severe shock. These hold as true now as they did when we first published them.
These emphasised the flexibility that there is within the scheme funding framework, and that we will apply this pragmatically - recognising that the best support for a scheme generally comes from a healthy, going-concern employer.
We have seen changes in behaviour in light of these statements. Not only are recovery plans on average a year longer, but the use of contingent assets has also increased in recent years. These are indicators of employers and trustees working together to manage the very significant funding challenges they face. It shows that trustees have a better understanding of the importance of arriving at a plan which is reasonably affordable, as well as the importance of taking steps to strengthen the scheme’s position where cash support is not readily available.
We have committed to monitoring the ongoing affects of the economic crisis, including QE, on pension funds and sponsors and, as I have said, we plan to publish further guidance for trustees on funding issues next year. Where employers or trustees have material concerns of immediate urgency, we encourage them to talk to us as soon as possible.
Before I move on I would like to highlight a few expectations that I have of my team at the regulator for 2012.
Firstly that we will continue to increase the level of clarity and transparency we provide about the way we work.
During 2011 we made an increased use of s89 notices, which enable us to set out the issues that we consider and the decisions we reach in individual cases. You can expect this to continue during 2012.
Next year we will also publish an updated version of the procedures for making determinations, including preparation of cases by the case team and the Determination Panel’s decision-making process. We plan to consult on these during 2012.
And finally during 2012 we will publish more detailed information about our approach to regulating DB in the future. We have already indicated a more segmented approach to regulation, taking a greater interest in schemes that fall into more risky segments - such as those schemes with a very weak employer covenant - and having less frequent or less intensive interaction with those schemes in a strong and stable position.
The challenge for regulating the DC landscape
But turning now to DC…
Hopefully you are already aware of our ongoing review of the DC landscape and market, but to recap briefly –
At the beginning of this year we published an analysis of the DC landscape in our discussion paper ‘Enabling good member outcomes in work-based pension provision’.
In this paper we highlighted that, as they currently exist, many DC schemes are not suitable for use under automatic enrolment. Not only are standards of scheme oversight and governance mixed, but too many schemes currently provide poor value for money. They are simply not designed to best enable members to get a good outcome from their savings.
From that analysis we set out 6 important elements that we believe will enable members to achieve a good outcome from their savings.
These are:
- appropriate decisions about pension contributions;
- appropriate investment decisions;
- efficient and effective administration;
- protection of scheme assets;
- value for money; and
- appropriate decisions about turning pension savings into a retirement income.
Our discussion paper elicited responses from a wide range of parties from right across the pensions industry: providers, advisers and trustees, as well as employer and consumer representative bodies.
Respondents from each of these groups came back to us with some very strong views about how to improve DC – and unanimously agreed that change is needed.
Our task now is to consider how we can help the industry to make sure that these elements are present in every DC scheme - both by improving standards in existing schemes and also ensuring that every scheme designed for use under automatic enrolment has the elements necessary for members to achieve a good outcome.
Improving practice in the stock of current DC schemes
Trustees play a central role in ensuring the safe custody of member’s savings – and as such, helping you to carry out your role confidently is central to the success of our ongoing work; particularly in addressing the issue of sustainable governance, in new and legacy schemes.
This is why our focus is now squarely on increasing the support we give to trustees in carrying out their role effectively.
We know that the role of the trustee has traditionally been focused on managing a DB scheme – so it is perhaps not surprising that for the past 4 years our annual Governance survey has consistently shown that DB outranks DC in terms of trustee time and engagement.
Our most recent research shows that 67% of DB trustees are likely to be engaged with their scheme compared to only 34% of trustees of DC schemes. These trustees are more likely be actively involved with ongoing training; know when to seek external advice and support; and also be more engaged with administration activities.
And in a recent survey of trustees of hybrid schemes, 65% of trustees spend less than 25% of their trustee meetings on DC-specific matters.
This situation must change – because whether you are involved with a DC scheme now or not, it is almost certain that you will be responsible for DC assets in the future.
To this end, in October we published a couple of short, practical statements intended specifically for trustees with DC responsibilities.
The first of these statements aims to help trustees to better understand the different role they will play in protecting DC members. In particular the different approach needed to issues such as investment decisions, costs and charges, member communications and retirement choices.
This was followed by a second statement, which helps trustees of hybrid schemes - those with elements of DB and DC - to appreciate the unique challenges that they face - for example ensuring that assets are separately identifiable and that investment decisions are appropriate for the needs of the different sections of the scheme.
These two statements are an important step on a long road to better supporting trustees, and we encourage all trustees who have any responsibility for DC assets to read them. We also urge trustees to complete - or to review - the DC modules of the trustee toolkit.
Six principles for good design and governance of workplace DC
Looking forward, we need to ensure that all new pension products designed for use under automatic enrolment are designed with members’ interests in mind.
This work requires significant input from trustees and others, such as providers, administrators and advisers.
Today marks the start of the next step in this dialogue.
This next step, which will involve many key parties from across the industry, is the publication of 6 high level principles for good design and governance of workplace DC provision. We have published these principles this morning.
These principles will:
- provide a structure against which schemes will be able to assess their own characteristics;
- provide a framework within which employers can assess the pension products that they select for automatic enrolment; and
- inform our regulatory intervention across all forms of DC pensions.
In the coming months we will engage with providers, administrators, advisers, and trustees, as well as with employer and member representative bodies to help us to develop a shared understanding of the principles.
At the end of this phase of our DC discussion, we plan to publish further tools and guidance on the features of a good DC scheme.
The tools and guidance will specifically help providers and advisers to understand what we expect a good scheme to look like. They will help trustees to understand what our expectations are in terms of long-term governance structures. And very importantly they will help employers to better recognise a good scheme - thus empowering them to make a confident decision when selecting a scheme for automatic enrolment.
We have published these principles on our website, but I would also like to share our thinking with you now:
1 – We believe that schemes should be designed to be durable, fair and deliver good outcomes for members.
This means that all schemes should have the features necessary to deliver good outcomes - such as the provision of a suitable default fund, transparent costs and charges, protected assets and sufficient protection for members against loss of their savings.
2 – Schemes should have a comprehensive governance framework, which is established at set-up, with in which clear accountabilities and responsibilities are agreed and made transparent.
This includes identifying the key activities that need to be carried out, and ensuring that each of the activities has an ‘owner’ who has the necessary resources to carry out the activity.
3 – In a good scheme, those who are accountable for scheme decisions and activities need to understand their duties and should be fit and proper to carry them out.
This will ensure that those who are given accountability or responsibility for key governance tasks are able to carry them out. The principle will cover definitions of fitness and propriety for accountable parties and also conflicts of interest that may arise.
4 - Schemes should benefit from effective governance and monitoring through their full lifecycle.
This means that schemes regularly look at the ongoing governance and running of the scheme. Regular review of internal controls and monitoring systems will ensure that the scheme continues to meet its objectives, and continues to be run with the best interests of its membership in mind.
5 – All schemes should be well administered with timely, accurate and comprehensive processes and records.
This principle is informed by our previous work on record keeping, looking specifically at the administration processes required in a DC scheme.
And finally
6 – That communication to members is designed and delivered to ensure that members are able to make informed decisions about their retirement savings.
This includes all communication with members during their time with the scheme – from joining through to making decisions about converting their pension pot into a retirement income. It also means clear and fair promotion of the Open Market Option.
We believe that schemes designed around these 6 principles, at set-up and throughout their ongoing operation, will be better placed to deliver the 6 elements that we set out in our initial discussion paper – and consequently better able to help members to achieve a good outcome from their savings.
To reach our goal of universally high quality DC we will need support and co-operation from across the industry. We hope that you will play your part in this process by providing your thoughts to the NAPF - who will play a prominent role in helping us to understand the views of the pensions sector on DC matters.
Automatic enrolment
All of our work to improve DC is geared towards getting the pensions industry ready for the influx of members it will receive once automatic enrolment is introduced - to 8 million individuals who will eventually be saving more or saving for the first time.
In January this year we carried out some research to gauge the engagement and preparedness of the industry for automatic enrolment so far. This formed the basis of much of work throughout this year.
We found that employer awareness of the reforms is relatively high, at least amongst large employers, and that levels of support for the reforms by employers of all sizes was very encouraging. 82% of large employers and 58% of micro employers agree the introduction of automatic enrolment is a good idea for their employees, and 74% of large employers and 58% of micro employers believe that it is their responsibility to look after their employees’ long-term future, irrespective of legal duty.
However only 65% of trustees we surveyed said that they see themselves as having a role to play. Even fewer have made any active moves to become engaged with preparations for the new duties.
This is a disappointing finding as we see all trustees as playing a role in supporting their sponsor and supporting their members.
Whether or not the scheme is being used for automatic enrolment, trustees will retain the same responsibility for acting in the best interest of their members. This will include communicating with their members and ensuring that scheme governance works in favour of members’ needs.
Back in July we published a checklist for trustees to help clarify what we expect you to do as your sponsoring employer approaches their staging date.
The checklist, which is on our website, says that trustees need to have an agreed action plan in place; that the impact on the existing scheme needs to be fully considered; that – if appropriate – an implementation team needs to be put in place; and that the changes to the scheme need to be communicated adequately with all members.
But before doing any of the above it is absolutely vital for trustees, just like employers, to know when they need to act. This will give a timeframe to the rest of the activity.
The announcement last week by the Minister has changed that timeframe for some, but certainly not all employers.
No employer with a staging date before August 2013 will experience any change as a result of the announcement. All employers with more than 3,000 employees will reach their staging date as planned.
Those employers with fewer than 3,000 but more than 50 employees will still reach their staging date within this Parliament – and more details will be published in the New Year. And those employers with fewer than 50 employees will now not reach their staging date until the next Parliamentary term.
The majority of trustees affected by auto-enrolment – most of you in this room - will be associated with employers in the first two of these groups and I therefore urge you all not to let this stand in the way of your work to prepare.
The Minister has reiterated his commitment to automatic enrolment and that every employer will remain in scope. As an industry we therefore need to ensure that we keep up the pace of our work to help all employers to prepare for the new duties.
So to end, I just want to say again that we appreciate the work that you all do in supporting members in UK pensions. This is undoubtedly a challenging time for trustees and employers alike. There is uncertainty; there are difficult decisions to be made, and all within a shifting landscape.
The burden of risk for the outcome of retirement saving is moving farther from employers and more firmly onto members, and in this situation it is more important than ever that schemes are designed and governed well to give members the highest possible level of confidence in pensions.
Trustees play a vital role in this, a role that will continue to grow in complexity and importance as memberships expand as a result of automatic enrolment.
We hope that the work we are doing now, with your help, will help to lay strong foundations - enabling many millions of people to save for the first time, to save more, and do so in a secure environment.
Thank you