Lesley Titcomb – Pensions and Benefits UK 2016
Wednesday 29 June 2016
Thank you very much for inviting me to speak to you today.
As always at these events it’s good to see so many people here, all keen to learn from each other and to move our industry forward.
I think it’s fair to say that it’s not just all of us here that are paying attention to our industry at the moment. Pensions have rarely been more visible. Part of the reason for this is that more people than ever are saving for their future. More options are available for people when considering how to fund their retirement. And more employers than ever are now responsible for providing a pension for their staff.
Pensions have become a major topic of conversation, and, in recent months, have shifted away from the specialist, financial media and onto the front pages of the press.
And of course the other reason for the focus is the huge amount of press and media coverage of several high profile defined benefit (DB) cases, most notably BHS and Tata Steel. Both of which, as you know, we are heavily involved in. These are both complex situations, which are ongoing. It’s a difficult time for all those involved, particularly the people who work in these companies. It’s important that we are allowed to press on with our work, and government to continue with its work following the British Steel consultation, which closed on 23 June. So I hope you can appreciate that I am limited in what I can say. However I will be talking about some of the broader aspects as part of the current outlook for DB schemes.
It’s a little over a year since I was appointed Chief Executive at The Pensions Regulator (TPR), and we’ve made quite a few changes during that time. It’s really important for us as a regulator to adapt to the changing environment that we work in. So as our remit grows, and our regulated community expands, our approach to regulation is evolving. Our organisation’s vision and values have a new emphasis on being agile, responsive and bold in our decision making.
As you know, we have objectives to protect pension scheme members and the Pension Protection Fund (PPF) and thus its levy payers. And we are relentlessly focussed on achieving the best possible outcomes for them. We’re committed to driving up standards of governance and administration. We can and will be flexible in our approach when required, but we will not be bounced into a bad deal for pension scheme members or PPF levy payers.
I personally have made a real and significant effort to engage fully with trustees, with employers and with key stakeholders, and I encourage this in my team as well – because this will help us to regulate more effectively – and ultimately protect members’ outcomes.
I really appreciate coming to events like this, not just because I get the opportunity to share our thoughts and priorities with you, but also because I want and need to hear back from you. It’s important for us to hear first hand your ideas and concerns, and I look forward to answering some of your questions later on and meeting some of you around the conference.
Before I talk about our current priorities, let me first address the current outlook for DB and defined contribution (DC) schemes.
Private sector DB schemes make up a sizable part of the pensions landscape, with around 6,000 schemes, 12 million members and assets worth over £1 trillion. Recent high profile cases have brought greater scrutiny to the challenges faced by trustees of these schemes. And there are ongoing challenges, not least the volatility of the markets and the uncertain economic outlook.
This was an issue before last week’s referendum vote, but the decision to leave the EU means that market volatility is likely to continue – and may well impact on schemes’ funding positions. Some people may be shocked by the result of the referendum and its impact and are asking what it means for their pension or their scheme. I’d like to join those responsible commentators who have been urging trustees and savers not to take any hasty action, particularly as there is unlikely to be any immediate change to current UK pensions legislation.
We encourage schemes to take a long term view of their expected risk and returns and how this interacts with their funding plans and risk appetite. Trustees and employers need to work together to understand how the scheme risks - and the employer’s ability to underwrite those risks – may change under different economic scenarios. So given the events of the last week, schemes may wish to re-evaluate the strength of their employer covenant over the coming months.
In the meant time I assure you that TPR will continue to engage with European institutions such as EIOPA (European Insurance and Occupational Pensions Authority), while we await further clarity as to the nature of the UK’s new relationship with the EU and any transitional arrangements. We will of course continue to monitor the markets and other economic developments and will provide further guidance to schemes if necessary.
As many of you will know, we published our latest annual funding statement in May. This shows our analysis of current market conditions and how sponsoring employers and trustees of DB schemes can agree appropriate funding plans.
Our data suggests that despite market pressures, the majority of DB schemes completing valuations this year should at the very least be able to maintain existing recovery plans.
The AFS shows that schemes’ deficits are likely to have increased in many cases. However our data suggests that for the majority of employers, profits have also increased. More than half of FTSE350 companies paid out ten times or more to shareholders than to their scheme. So, many employers should be able to maintain or even increase current deficit recovery contributions (DRCs).
The outlook for many schemes is still positive. In our view, there is no evidence that suggests a systemic affordability issue for employers with DB schemes. The vast majority of employers with DB schemes should be able to meet their long term financial obligations to their schemes’ members, with careful management.
It’s worth recalling that in July 2014 we were given a new statutory objective – which is specific to scheme funding – which is to minimise any adverse impact on the sustainable growth of an employer. So our goal, and the way the framework is designed, is to strengthen the pension scheme but with appropriate flexibility to give employers the breathing space they need to grow their business.
It will not surprise you to know that this balance is not always easy to achieve, because at times our objectives can be in tension.
So the funding framework is specifically designed to be flexible; to allow us to strike that balance as much as possible, between protecting members of schemes – and the PPF – and not undermining the sponsoring employers' ability to grow their business by placing unreasonable burdens on them.
We do understand that investing for growth in their business will mean some employers are not able to increase their DRCs. And in these cases we expect employers to discuss this openly with their trustees. But at the same time, it is important that employers treat their pension scheme fairly and we expect trustees to question employers’ dividend policies where DRCs are constrained. Our DB code and covenant guidance that sits with it can help both parties have constructive discussions in these circumstances.
I want to emphasise that the system has been designed carefully: to be flexible enough to ensure that most schemes will pay out the benefits they have promised as they fall due, while not requiring all schemes to be fully-funded at all times.
So we expect trustees and employers to work collaboratively to agree funding plans that meet both their needs. We believe that appropriate funding agreements can be reached in the vast majority of cases without the need for direct regulatory intervention.
We are always keen to explore credible new ideas with the pensions industry, and to work with sponsors and trustees to secure sustainable schemes that deliver good member outcomes over the decades to come.
But I think we can all expect an increased focus on the existing DB framework, for example, with questions around the ease with which employers and trustees can restructure a pension scheme. This in turn will put our role as regulator in the spotlight – is it right that our objectives require us to protect member benefits and the PPF while minimising any impact on employer growth? What are the respective roles of the trustees and TPR?
These will be interesting questions to explore over the coming months.
Let’s now move on to DC schemes. Automatic enrolment has led to a huge increase in membership of DC schemes. While DC memberships have increased rapidly, the number of open schemes has dropped.
We’re seeing a concentration of memberships in larger schemes and we do welcome this trend. In particular we have seen an increase in memberships and assets in multi-employer schemes, such as master trusts. We encourage this too and we believe they have the potential to offer stronger governance, more sustainability and better value for members.
But although this market consolidation has the potential to benefit savers it also has the potential to magnify any negative consequences.
A feature of large master trusts is obviously that they have no sponsoring employer to support them. Therefore there is a risk, if something goes wrong, of members being forced to meet the administration cost of a wind up if the scheme fails. In the event that a master trust was forced to close, we would work with them to ensure that an orderly and timely transition to another scheme was carried out. But clearly this is something we’d all like to avoid.
At TPR we’ve had concerns around this for some time and we have lobbied hard for stronger laws around master trusts. So it goes without saying that we welcome the new Pensions Bill which proposes to give us new powers to regulate master trusts. We are working with government to develop that Bill, which will contain these powers to ensure master trusts are strong, durable and well placed to deliver good member outcomes.
It’s going to be a long time before that bill passes through Parliament. So until then, and up to now, we have been strongly encouraging and supporting all master trusts to adopt the voluntary assurance framework we developed jointly with the ICAEW.
We are pleased that ten major master trust providers operating in the automatic enrolment market have already committed to the framework and call on other providers to follow their lead. Master Trust Assurance provides employers with confidence to choose a scheme which has been independently reviewed to show it has adopted standards that meet the DC code and DC regulatory guidance.
And to promote scheme choice for employers even further, we have now added the first group personal pension to our new online list of GPPs open to all employers.
Among other developments, our revised DC code has been well received and is due to be laid in Parliament shortly, and will go live, along with the associated 'how to' guides for trustees, next month. These guides have been written after extensive engagement with advisers, trustees and our key stakeholders. They help trustees to meet their legal requirements and follow good practice while running their schemes.
I’ll come back to the role of trustees in a while.
In a change from last year, schemes are now required to provide information about how they comply with the requirements brought in by legislation in 2015, including charge controls and scheme governance.
Trustees are also required to indicate completion of the chair’s statement in their scheme return, and will be fined if they don't comply. In fact, just today we have published details of the first fine against a DC scheme for failing to produce a chair’s statement. This case demonstrates that we will comply with the law, as we are obliged to, and will impose a penalty where trustees fail to prepare an annual governance statement signed by the chair of trustees, even where the scheme itself brings this to our attention.
We are disappointed that scheme return completion rates have fallen at a time when the importance of accurate returns is greater than ever. The information in scheme returns is critical in helping us to regulate schemes effectively. We do expect full cooperation in this area and for trustees and managers of all schemes to send in their scheme returns on time.
Overall, it’s clear that DC pensions are becoming the dominant form of pension provision. More and more people are saving for their retirement through such schemes, and master trusts in particular. It is these savers, rather than their employers, who are bearing the risk of the investment. That’s why it’s so important that they have as much assurance as possible that their savings are protected and why high standards of governance and administration are so important.
Let’s move on now to automatic enrolment.
Automatic enrolment (AE) continues to be the most visible priority for us. So far it has been a huge success. More than six million workers have now begun saving into a workplace pension as a result of AE. More than 120,000 employers have now completed their new duties. Compliance rates amongst small and micro employers are in the high nineties. Opt-out rates are much lower than expected.
Many businesses went though the AE process some time ago and are now looking at re-enrolment. However there are hundreds of thousands of small and micro employers that are facing automatic enrolment for the first time.
This is a huge operational focus for us, which has required a considerable change in our approach. We knew that our communications – the letters we send out, the awareness campaigns, the guides on our website – had to be changed to work for these employers. Because small employers act in different ways to large companies. In many ways they act as individuals rather than organisations.
So we completely revamped our language and our approach in order to reach these employers.
I’m pleased to say that around 95% of the first group to reach their staging date are now compliant. The first quarter of 2016 saw a significant increase in the numbers of employers reaching their deadline to comply. Over 31,000 completed their declaration in the period, compared to just over 2,000 in the same time last year. Not surprisingly, given the increase in numbers, we are seeing an increase in the number of times we exercise our powers and there are a minority of employers that have needed a nudge of enforcement action from us to get them over the line.
Hundreds of thousands of small and micro employers will continue to 'stage' through to 2018, so this will continue to be a focus for us for many months to come.
And we remain in listening mode. Employers told us they needed help choosing a scheme, so we added a list of master trusts to our website and, more recently as I mentioned earlier, group personal pensions, to help them. We will continue to listen and continue to improve the journey wherever we can.
Use of powers
I’d like to briefly touch on a couple of topics which are relevant to all types of schemes.
First, our use of powers. We have a range of powers, including issuing compliance notices and civil penalties, removing and appointing trustees. We also have a very useful power to be able to publish information about particular cases – the so called section 89 power. But it is important to understand that we don’t measure our success by how often we have to use these powers and we would encourage others not to do so. Our experience shows investigations don’t often result in the need for specific regulatory action to achieve the desired outcome; many are resolved through a settlement earlier in the process.
Where pension schemes and their sponsoring employers are in a precarious position, we’re always willing to work closely and creatively with them to try to deliver a solution that balances the interests of the members, the PPF and its levy payers, and the employer.
But where necessary, we’ll take regulatory action to secure members' benefits and protect the PPF by issuing a Financial Support Direction or Contribution Notice. These powers are sometimes called our 'moral hazard' or 'anti-avoidance' powers and we've found that the very existence of these powers can act as a deterrent against avoidance activity. An indication that we may use these powers is very often enough to encourage the relevant parties to reach a resolution, rather than risk formal enforcement proceedings.
We talk a lot about education and enablement at TPR. But I want to make clear that while we are committed to education and enablement to support trustees in their role, we are also clear that there comes a point when we have to shift into enforcement mode and investigate formally with a view to using our powers. We are encouraging our teams to be very clear with schemes when this decision point has been reached. We are also working to speed up the conduct of cases, both in the period when we are trying to resolve issues with trustees and employers informally and when we have moved into the formal investigation stage. You can expect clear deadlines for responses and a strong focus on compliance with what we call the basic hygiene requirements, such as the prompt submission of scheme returns and valuations.
21st century trustee
Moving on now to our work on trusteeship, and what a 21st century trustee should look like.
Many of you will have heard me talk on this subject already. As part of our drive to raise standards we have been considering what skills and competencies a trustee of the 21st century needs.
We’ve conducted in depth research with trustees across a range of schemes. We’ve even sat in on board meetings to fully understand the challenges trustees are currently facing.
We do recognise that there are significant challenges for trustees; not just in acquiring the skills and knowledge necessary to be effective trustees, but also having to adapt to continuing and unprecedented pension reform. And we work closely with trustees to try and improve their competence. Our primary purpose is to help them improve, but we will look at alternative solutions if certain schemes cannot or will not improve.
A key learning from our research – which covered different types of schemes – is that a lot of good governance does exist, and many trustees are doing a fantastic job. But we also know that good practice is far from universal.
Some schemes are simply not meeting the standards we expect, and there is a real risk here. Some segments are struggling more than others, for example small schemes versus large ones, DC versus DB.
For us, understanding why some trustees do not, or will not, engage with us is vital. And, through this understanding, we and the industry must ensure members are in well run schemes, and not left behind in second class schemes.
However, while our findings indicate large schemes, and DB schemes overall, may have better governance, this does not mean that small schemes or DC schemes are generally bad. We see examples of great governance in small DC schemes and poor governance in large DB schemes. Small schemes, though, clearly do face particular challenges. They tend to have lower levels of resources than large schemes and may have lower levels of engagement with their members and with us.
That’s why we are looking at targeting our communications and how we engage with trustees. We don’t think one size fits all. Just as we adapted our communications to smaller employers regarding automatic enrolment, so we are looking to adapt our communications and our educational offering to certain types of trustees.
Fundamentally, we believe that good governance principles are universal and should apply irrespective of scheme type, whether DB, DC, public service, or hybrid. The landscape in which trustee boards are operating is going to keep changing. There is new legislation on the horizon, the continued roll out of auto enrolment, the constant threat of scams, challenging market conditions and increasing complexity in areas like investment.
Next month we’ll be publishing a discussion paper which will explain how our research has already had an impact on our work to date and how it will inform our approach going forward. Since good governance and board effectiveness are common to all types of pension schemes, we need to reflect this in our wider guidance.
I do hope you’ll engage with us on that discussion paper when it comes out.
It’s a lively and exciting time to be working in our industry.
There is much good work going on, as we’ve heard from our colleagues at this conference. There is much debate and commentary about whether our pensions system is working, not just within our industry, but in the wider community. I think this level of debate and level of engagement is to be welcomed. And of course there is much to think address for the future, perhaps even more so after last week’s referendum decision.
Whatever happens in the months to come it is clear that the UK pensions sector will continue to need the robust regulation that we at TPR currently provide. Our work at TPR will go on, within the system that Parliament gives us. We will continue to engage with you, our regulated community, as much as we can. We will continue to learn and adapt as our remit grows. And above all, we will remain focussed on our pursuit of the best possible outcomes for schemes and scheme members through the delivery of our objectives.