Lesley Titcomb – Eversheds: Meeting the challenges of pension regulation
Thursday 1 December 2016
Thank you very much to Eversheds for hosting this event and for inviting me to speak here today. It’s 1 December, so it’s a good opportunity to take a look back over the year and also to look forward to the challenges of 2017. Sitting in this room, you can’t help but think, are we rejoicing in gladness or are we enduring the heat of the conflict? To be quite frank it’s probably both.
Pensions have enjoyed – if that’s the right word – a high profile in the media this year, particularly around the affordability of DB schemes, as we’ve heard. But it’s important not to let our thoughts linger too long on the headlines.
There has been a huge amount of good work done this year, across our industry, and it’s important to acknowledge the positive developments. The new Pension Schemes Bill is bringing, Parliament willing, much needed regulation for master trusts. And as the Minister has just said, there will be a national consultation on options to tackle pension scams, as announced in the Autumn statement. And both the FCA and the DWP have just announced their intention to put a cap on early exit charges for work place pensions. All of these things are significant. They will substantially improve the protection and transparency around members’ savings. They will also help to build confidence in pensions - and building confidence in pensions is, I’m sure, a goal that all of us here today share.
So in spite of some surprising, not to say startling stories, and for us at TPR some challenging cases and a level of public scrutiny not seen before, 2016 has not been all bad.
I’d like to spend the next 20 minutes or so highlighting a few things we at TPR have been concentrating on recently, and looking ahead to the challenges of the next 12 months.
First, let’s look at defined benefit (DB) schemes.
It’s clear to us that obviously the 6,000 plus DB schemes that exist in the UK are operating in a very challenging environment, and have been for a while.
Trustees are contending with persistent low interest rates, ongoing market volatility and the financially inconvenient fact that we are generally living for longer. These conditions as we know have led to some large scheme deficits, with the increases (and might I note rarely the decreases) attracting headlines, and have provoked a debate in general terms about whether DB schemes in general are affordable. Several large and at times high profile cases have, at times, added an emotive flavour to that debate.
As the regulator, our analysis of the data does not support the argument that there is a widespread affordability issue in terms of schemes being able to pay the pensions they are due to deliver. Which is what, as The Pensions Regulator we are principally concerned with, the narrow question of affordability. Having said that we acknowledge there is a wider debate about the desirability of paying so much into DB schemes over such a long period, and over questions of intergenerational fairness that’s been highlighted.
We also recognise that there are a minority of schemes whose sponsors have ?long term financial weaknesses which may lead to some of those schemes falling into the PPF eventually. But we need to recognise that these failures are unlikely to happen all at once and the level of risk they pose to the PPF is within a manageable range.
There are existing mechanisms in place to help schemes in distressed circumstances – for example scheme restructuring is possible, as are regulated apportionment arrangements in certain limited circumstances. And these may serve to keep some schemes with weak employers out of the PPF. But they undoubtedly will not be a solution to prevent all distressed businesses from failing. We have to recognize that business failures are a normal part of the economic cycle and it is this that the PPF was set up to deal with, to protect members' benefits when it happens.
It is not our role as the regulator to rescue failing businesses; we focus very specifically on the security of members’ benefits and protecting the PPF through trying to secure robust funding arrangements, while recognizing that sponsors need to be able to grow their businesses. The flexibility available within the current legislation is designed to allow this balance to be achieved and our integrated risk management guidance provides trustees and employers with clear guidance on how to achieve the correct balance between the needs of the scheme and the business.
Because the key point is that we all know that the best security for a DB scheme is the long term health of its sponsoring employer. We at TPR stand ready to work with trustees and employers to achieve that end, wherever it is possible to do so, without running undue risk to members’ benefits and to the PPF.
We are committed to working closely and constructively in difficult cases, involving distressed employers, to reach the best available outcome in challenging circumstances for those concerned. An example I can give you is the recent Halcrow case where we agreed to a restructuring of the pension scheme in quite an innovative way.
I have to say at times we have been a little surprised that employers and trustees do not make greater use of the flexibilities that are built into the framework. I’ve heard anecdotally Finance Directors or advisers say ‘the regulator wouldn’t like that’. Do you know that for sure? I want to emphasise that at TPR we are open to innovative ideas; we recognise the risks and the challenges that schemes and employers face. And of course we have a statutory objective to minimise the impact of the pension funding arrangements on the sustainable growth of the employer. This means we have to have regard to the financial health of the sponsoring employer as well as to the scheme that it sponsors.
But if I turn to what we might call normal funding situations, so when we are talking about the production of the valuation every three years, and the agreement of the recovery plan, I also want to make clear that as the regulator we will not wait forever for agreement to be achieved between trustees and the employer; there are undoubtedly some cases in the past where discussions have dragged on for too long. As you will know our overall regulatory approach is to educate, enable; and where necessary, enforce. We will move from educating and enabling to enforcing if we conclude that trustees and employers are not playing ball, and we won’t hesitate to bring our powers to bear if that is the right thing to do.
For those employers who are struggling to fund their scheme – we also have a very clear message: Do not walk away from your responsibilities.
Work with your trustees to agree a desired outcome for your scheme and the journey towards it, and be realistic. Be clear, adopt a congruent strategy, whether it’s to stay open, close, buy out, or de-risk. And work the strategy through to the end. We do want employers and trustees to work together to agree the valuation and a recovery plan, wherever possible.
And, we also observe that most employers want to do the right thing by their employees.
It is rare to have an employer who deliberately seeks to evade their responsibilities. But we are committed to pursuing those who do. You’ll be aware that we have reached settlements in a number of high-profile anti-avoidance cases, including cases that cross borders, such as Carrington Wire and Lehman Brothers.
I would also urge sponsors to think of the impact on your pension scheme early when you are considering a corporate transaction – and then talk to the trustees. If necessary, talk to us – consider whether clearance is appropriate. We can and will respond quickly if you can provide the information and answers to our questions that we need. We won’t be bounced into agreeing to a bad deal, but we do recognise the challenging timetables in this situation and if all parties co-operate we can turn things round very quickly.
So, we believe these aspects and the regulatory framework in general are largely working as Parliament intended. However, it is right that from time to time the system is reviewed, and now is certainly an appropriate time for that to happen.
We have just heard from the Minister about DWP’s intention to produce a Green Paper on DB pensions. We very much welcome this and we are continuing to work closely as the Minister indicated with his officials on this.
And the Work and Pensions Select Committee is coming to the end of its enquiry into the affordability of DB schemes and the regulatory system, and we have been actively involved with that.
Later in my speech I want return to what we at TPR are doing to make the aspects of regulation which are within our control more effective.
In the meantime, I would just note that as part of our commitment to transparency, and to help trustees and sponsoring employers of DB schemes as they plan for the future, we have just published our new annual DB landscape report. This looks at the entire DB landscape – including those that also provide DC benefits, and those schemes not eligible for the PFF – as at March 2016, and sets out the various trends we have observed over recent years.
Before I move on to DC schemes, I’d like to first talk briefly about automatic enrolment.
As we’ve just heard from the Minister, automatic enrolment (AE) has so far been an enormous success. It has made it the norm for workers to save for their pensions. It has significantly changed the pensions landscape, the markets and consumer expectations. Since AE began in 2012 over 6.7 million people have been enrolled into a pension. By 2020 the figure is expected to be 10 million.
But it’s not just from a policy point of view that AE has been successful. Automatic enrolment has also worked from a regulatory perspective. A quarter of a million employers are doing the right thing for their staff and have confirmed to us that they have met their duties. Nearly half of these are small and micro employers.
Recently in the press it’s been reported that there has been an increase in the number of times that we’ve used our enforcement powers to fine non-compliant employers in 2016. It is true, and it is not unexpected given the very steep increase in small and micro employers reaching their staging date this year. The smaller employers tend to behave less like a corporation and more like an individual. So as with all individuals, a minority of them leave things too late. In most cases though, the nudge of a compliance notice is enough to get them back on track and avoid a fine. Gratifyingly, compliance rates are so far consistently at the high end of our expectations.
It was also suggested in some press reports last week that a large percentage of businesses have had statutory notices from us ‘altered’ or ‘revoked’. That, in fact, is incorrect and this would be a good opportunity for me to put the record straight. Fewer than 10% of the employers who have been issued a statutory notice have asked for it to be reviewed. The majority of employers who receive a notice go on to comply with their duties. Where reviews do take place, a number of notices are amended. But in the vast majority of cases this is because we didn’t have the correct information about the status of the employer and whether they needed to complete AE duties in the first place, and this only comes to light once we start the enforcement process.
We very much welcome the 2017 review of automatic enrolment and the important discussion on how to get more people saving more. We believe it’s the right time to look at how we build on the success of AE so far. Obviously any key policy decisions on widening the scope of AE – say to include the self employed, or those under the £10,000 pay threshold – will be made by Government and Parliament. But at TPR we’ll be listening closely and participating in the wider debate.
I can now turn to defined contribution (DC) schemes, which are becoming, as a result of automatic enrolment in particular, the dominant form of provision in the pensions landscape. It is the savers of course who are bearing the risk of these schemes. That’s why it’s so important that there are high standards of governance and administration in these schemes, and that savers receive good value for money. The vast majority of newly enrolled savers are being enrolled into large DC schemes, primarily master trusts.
And that is why we are absolutely delighted of course at the new Pension Schemes Bill, which was introduced into the House of Lords in September. We’ve been expressing concerns for some time about master trusts, in terms of the lack of effective gateway regulation to look at those entering the market, and the lack of protection for members in the case of a wind up. The Bill, when introduced, and Parliament willing, will give us new powers to authorise master trusts before they can open for business. And to stay in the market they will have to continue to meet strict criteria, including protecting members’ funds in the event of a scheme wind up. And we’ll also have the power to de-authorise those that don’t meet our criteria.
We believe master trusts have the potential to offer better governance, sustainability and value for members. Many of the tens of thousands of DC schemes struggle to meet adequate standards of governance and administration and can pose a risk to good member outcomes. So it may be that consolidation, perhaps within authorised master trusts, may be the best long term solution for members of such schemes. The Bill could act as a strong driver for a market led consolidation of the huge oversupply of these DC occupational schemes.
The big question with regards to DC schemes is – do they provide members with good value? Assessing value for members is a key responsibility for trustees and we want them to use their judgment as to whether their scheme offers good value. There is no single approach to the assessment of value. We want to see trustees act as demanding consumers on behalf of their members.
However, there is no doubt that costs and charges are a significant element of the value proposition. We therefore welcome the FCA’s proposals to compel investment managers to disclose costs and charges to trustees, which will greatly assist trustees in their assessment of value for members. The interim findings of the FCA’s competition study on asset management showed last week that there is limited price competition, particularly for actively managed funds. Which means that investors often pay high charges.
We know there is still concern among members and trustees about the lack of transparency of charges and costs. So we can expect that greater transparency is highly likely to continue to be an area of focus for all of us.
We also welcome the announcement that both the FCA and DWP will be capping exit charges. Approximately 3% of members may be in a scheme where an early exit charge might apply. So the cap will help to level the playing field with contract based schemes and deter any occupational schemes in the market from trying to levy any exit fees. The cap will therefore remove a barrier for people accessing their pots under pension freedoms.
Before I finish I’d like to briefly mention the work we’re doing in relation to trustees, which applies across the vast majority of schemes that we regulate.
Trustees play an absolutely crucial role in running schemes, and their role is becoming more complex.
Many of you will have heard me speak already about the idea of the 21st century trustee, we conducted a huge amount of research last year into understanding how they carry out their role and the challenges they’re facing. We launched a discussion paper in July inviting comments to help shape our future regulatory policy in this area. I’d like to thank those of you who have taken the time to respond to that.
We’ve now had time to study responses and will be publishing our report in the next two weeks on what we plan to do next.
One thing I can tell you is that we intend to be much clearer about our expectations of trustees. Clearer on the factors that really concern us, that will trigger enforcement action.
And clearer on the point at which we pivot from ‘educating and enabling’ into ‘enforcing’.
One area I’d particularly like to stress for trustees and advisers, as trailed helpfully by Francois earlier this morning, is the importance of data security. Technology has opened up all sorts of opportunities for the pensions industry, we heard for example about the dashboard, but it’s also opened up the threat of cyber attacks.
Pension schemes you can see are likely to be attractive targets of cyber criminals, because they hold a lot of personal, employment and financial data on individual members. Also we are all becoming increasingly reliant on online provision and interactions so the provider of the service also becomes an issue.
Unlawful access or attacks would be very serious for a scheme and its members, and could result in identity theft, loss of data or even financial assets.
Some pension providers, particularly those subject to PRA and FCA supervision, will probably already have a security strategy in place. But trust based schemes may well need to look at tightening up their existing arrangements.
It is the trustees who are the ‘data controllers’ under the Data Protection Act, so they must make sure that they have all the proper protocols and policies in place. And that any third parties they use also have the correct controls in place, such as firewalls and access controls.
So we believe that trustees should capture cyber security as a key risk on their risk registers and review it regularly. Particularly in the light of pension freedoms, as member transactions could be targeted by cyber attacks.
Our new DC guide on administration has more information for trustees in this area, and our website sets out what trustees can do to mitigate the risks. You can expect that this will be an area of focus for the regulator over the coming months.
So I’ve spoken to you about our priorities and the way we educate and enable, and sometimes enforce, across our regulated community. But being a regulator is not just about TPR telling you what to do; we also have to think about how we do things as your regulator and be able to explain to you what we do and what we don’t do, how we do it and how we make the choices we have to make – for example, how we pick which cases to pursue, or how we allocate our inevitably limited resources.
During the last decade the pensions system has undergone momentous change. Our role and responsibilities have increased significantly. The economic environment in which we operate has been tremendously challenging, and remains uncertain. Our regulatory approach has had to adapt over the years to meet these challenges, but actually in many ways has remained fairly constant for the last 10 years.
We believe that the time is now right to take stock of all these developments. We need to consider them in light of further challenges ahead, for example the continuing shift in provision from DB to DC, the UK’s exit from the European Union, and the introduction of a new Pension Schemes Bill.
So I’ve commissioned a piece of work, within TPR, to consider how we should exercise our responsibilities, in regulating across DB, DC, public service schemes and in our automatic enrolment responsibilities, for the next five to 10 years.
This programme, which we refer to as TPR Future, will cover all aspects of our regulatory remit, and will look at our operational practices, and how we use our powers, the other regulatory tools available to us, the resources that we need.
We’ll be taking account of the changing environment and also the lessons we’ve learned from operating the regime over the last 10 years.
We’ll be asking key questions, such as: do we have the right balance between educating, enabling and enforcing? Do we identify the right risks when we allocate our resources? Does DC and public sector scheme regulation require a different approach to DB? And how are we going to deliver that, if that’s the case? Which regulatory tools are most effective in which circumstances?
There are also some challenges for ourselves about how we want to be. Can we be quicker and more responsive? Can we be clearer about what we expect of trustees and sponsors? And I don’t just mean in the guidance, I mean how we communicate with individual schemes on particular issues, such as their valuation and recovery plan.
We expect to do some things differently as a result of this work and we will then need to understand what it means for our resources – our people, data, systems, educational material and so on.
We expect to spend four to five months preparing recommendations for change. We are involving our stakeholders in this work, indeed some of you may already have been approached. And we very much want to hear what you think. I look forward to hearing your views.
There is no doubt that 2016 has been challenging, for us and for many in our industry. But there is a huge amount of positive work going on. There is also plenty to do and a lot to look forward to in 2017. It’s up to all of us to play our part in building a strong and confident pensions industry in the UK.