Lesley Titcomb – Punter Southall Annual Pensions Conference 2015
Good morning, and thank you for inviting me to speak today on the topic of safeguarding pension schemes.
In my first six months as chief executive of The Pensions Regulator, I have asked a great many questions about the broad range of roles we fulfil, and how effective we are.
I have met many of our key stakeholders along the way, some of whom are here today.
And it is clear to me that among our greatest priorities is to safeguard occupational pension schemes to create better outcomes in later life for workplace savers, particularly in the wake of such radical reform.
How we meet this challenge goes to the heart of everything we do.
It is at the heart of our ‘educate, enable and enforce’ ethos; and is central to our aspiration to be a strong, agile, fair and efficient regulator.
So, it’s in the context of safeguarding pensions that I will spend the next 25 minutes or so talking to you.
I will look at our approach to regulating defined benefit (DB) and defined contribution (DC), and how we are working to understand how the market is reacting to the pensions revolution.
I will talk about the importance of the flexible funding regime that underpins the DB code of practice, and our longer term strategy for DB regulation.
And as we develop a vision of what the 21st Century trustee might look like, I will touch on the questions this prompts about trustees as individuals, their competence and capability and the structure of trustee boards.
Educate, enable and enforce
At The Pensions Regulator, our approach of 'educate, enable and where necessary enforce' underpins how we regulate DB and DC schemes.
It is also our approach to helping employers who are preparing to meet their automatic enrolment duties.
We believe the best way to regulate is to support the regulated community to understand and meet its obligations through appropriate guidance and tools.
Our goal is to provide clear codes of practice, guidance, reports and online learning resources that set out what we expect from trustees to deliver well-governed, value for money schemes and good outcomes for members. But beyond this, we take different regulatory approaches to DC and DB.
To start with DC.
It is clear that DC pensions will become the dominant form of pension provision, particularly as a result of automatic enrolment.
And we know from our own research that there are now more active members in trust-based DC schemes – over three million – than in DB, with 1.8 million. This trend looks set to continue.
But crucial in this space is the recognition that members bear the risks of poorly performing DC schemes, unlike in DB where trustees and the sponsoring employer must deliver promised benefits. More on that later.
The pace of change in the DC space has led to different risks to member outcomes and so we will need to adopt a style of regulation appropriate to this rapidly changing world.
We need to be practical, providing you – the trustees and scheme managers – with the information and support you need to keep up with the changes and freedoms, to which you are still acclimatising.
We need to be agile – intervening at the right time, with the right regulatory toolkit, to prevent problems developing. That might be via education and communications, or it may be making more expeditious and creative use of our powers to safeguard members’ savings.
And we need to be open and collaborative. For example, we have spent the summer meeting schemes to understand how they are adapting to the changes and the decumulation options they are offering members. Last month we published the findings of our survey on the availability of decumulation options, the prevalence of exit fees and charges and the transfer process.
Occupational pension schemes come in many different forms and the survey found differences in available decumulation options. We found that 25% of schemes are considering offering new options.
We will continue to work with Government, the FCA and industry to understand any barriers to members accessing their pension flexibly, and promote guidance to support members’ decision-making.
And we will continue to gather information on what schemes are offering and the take up by members.
However, with more freedom comes greater risk to members.
So our approach to regulation must provide greater member protection in areas such as pension scams.
We continue to work with our partners in Government and key criminal justice agencies to tackle scams. This summer we launched a new campaign to give pension savers the help they need to safeguard against potential scams, using new infographics.
I urge you all to make members aware of our Scorpion material which flags the risks involved. Full information is on our website.
The Pensions Regulator – safeguarding pensions.
Our success in DC
It is clear from our own research, and others in the industry, that standards vary across the DC landscape – necessitating targeted approaches to large schemes and master trusts, which may be used for automatic enrolment, and smaller legacy schemes.
There are some encouraging signs as to how the DC market is developing and maturing – with schemes placing a growing emphasis on governance standards.
Research we published earlier this year shows that nine out of ten master trusts and 86% of large DC schemes have reviewed their governance processes against our quality features.
And there was a similar pattern relating to the new minimum legislative governance standards introduced in April, with master trusts and large schemes showing the highest awareness of the changes.
In contrast, only 59% of medium and 39% of small schemes have been reviewed against the features. Where schemes are falling short, we expect them to improve or we may take enforcement action against them.
The new DC code
For the DC trustees here today, you will no doubt have followed our current DC code of practice to embed the right quality features in your schemes.
And hopefully you will be aware of the extra information we have issued recently to help you get to grip with the new requirements, including an essential guide to the governance standards and charge controls.
We are going further in our work to support trustees in the DC space by publishing a revised code of practice for consultation later this year.
On this I have some good news.
Our DC team has risen to the challenge of reducing the length of the code by around 50%, something I am sure you will all welcome.
We have applied a number of design principles when working on the code. It will be short and simple, and include enough practical guidance to ensure the standards we set are understood.
It will be clear and unambiguous, leaving no room for uncertainty. And it will seek to set out in one place the standards of conduct and practice we expect of DC trustees when complying with the law.
Key to the revised code is an assumption that you, the trustees of DC schemes, have a certain level of knowledge, and so the code does not need to be a basic 'how to' guide.
As we have done with DB, we will seek to support the core information in the code with good practice guidance.
We have a clear timetable for delivering the code. We will be formally consulting from November before the code is laid in Parliament next May.
Once published, the code will be supported in several ways, including new guides, designed to support the code and improve scheme quality and member outcomes.
The Pensions Regulator – safeguarding pensions.
I would like to turn now to our approach to DB regulation, and our longer term strategy.
While the rise of DC is clear to all, there is still a massive DB legacy that needs to be carefully managed – 12 million members, and assets worth more than one trillion pounds, vastly outstripping DC schemes at around 400 billion pounds.
DB schemes will play an essential role in delivering retirement incomes for many decades to come but with the majority of DB schemes closed to new entrants, they are maturing.
Our approach to DB
The Pensions Regulator has always maintained that a strong ongoing employer is the best support for a well-governed scheme, but addressing the needs of an employer directly, as set out in our new objective, marked a clear change in our approach.
Put simply, our initial focus was on ensuring scheme deficits were reduced as quickly as possible through robust recovery plans in order to protect accrued benefits and the Pension Protection Fund.
Our approach now is to more explicitly balance an employer’s ability to invest in long-term sustainable growth against our objectives to protect benefits and the PPF.
This means far greater clarity and transparency in the way we talk to DB trustees and their sponsoring employers, and in the guidance we offer them in reaching appropriate funding outcomes.
Our DB funding code goes further than ever before in setting the expectation that trustees and sponsoring employers will work collaboratively to agree balanced funding plans that meet both their needs.
This sums up the key funding principles that underpin the DB code. I would like to particularly focus on the risk element.
The flexibility we have highlighted in the funding system gives more employers the breathing space they need to grow their business, and also benefits the scheme itself.
It recognises that risk taking is an essential feature of the system – it is not necessary or possible to remove all risks and an appropriate amount of risk can actually improve a scheme’s ability to meet its pension promises to members. Effective risk management is a key aspect of a healthy scheme.
We want trustees to work with employers to manage risks in an integrated way in the key areas of investment, funding and the employer’s ability to support the scheme covenant.
Use of powers versus risk taking
So how does all this work in practice, and when do we intervene to safeguard member benefits?
It is important to acknowledge the immensely challenging economic conditions in which you as trustees have been managing your schemes.
Our 2015 annual funding statement acknowledged that many schemes are likely to experience larger deficits than at their last triennial valuation due to changing market conditions.
Persistent low interest rates and falling gilt yields mean that it remains a testing environment for DB schemes with 2015 valuation dates.
However, scheme trustees that have followed the DB code and have assessed their options with their employer should be in a better position to cope with these changes in market conditions.
Trustees that manage the interaction between risk and investment, and govern their schemes well are less likely to become the focus of our attention.
We believe that appropriate funding agreements can be reached in the vast majority of cases without the need for direct regulatory intervention.
Where pension schemes and their sponsoring employers are in a precarious position, we are prepared to work closely and creatively with them to try to deliver a solution that balances the interests of the members, the PPF and the employer.
Where necessary, we will 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.
The very existence of these powers can act as a deterrent against avoidance activity.
And an indication that we may use these powers is often enough to encourage the relevant parties to reach a resolution, rather than risk formal enforcement proceedings.
Recent cases demonstrate that our anti-avoidance powers can prove highly effective even in very complex international insolvency situations and when pursuing overseas targets.
For example, in May we published a report detailing our investigation into the Carrington Wire DB pension scheme, leading to an £8.5 million settlement with two businesses domiciled in Russia and a decision to issue a £382,000 Contribution Notice against an individual who took control of the sponsoring employer.
This complex case demonstrates that we will, where appropriate, use our avoidance powers to seek to help protect member benefits, including in cases where targets are based overseas.
The Pensions Regulator – safeguarding pensions.
Long term DB strategy
As DB schemes mature, an increasing number will approach the point of paying out more in benefits than they receive in contributions.
Even closed DB schemes are expected to have obligations that project over the next 60 years and beyond. And while all schemes are susceptible to a deteriorating funding position if their investments do not perform as well as expected, mature schemes may have less time to correct deficits should these risks crystallise.
So what is our longer term strategy?
Crucial to our approach is to help trustees gain a sound understanding of risk and how to manage them as the window narrows. This is helping to shape the guidance we are developing.
Further to this, we are working with DB schemes to understand their long term journey plans and how they expect to implement those plans in order to pay promised benefits.
Three quarters of schemes have a journey plan and of these the most common aims are to pay members benefits and de-risk.
21st Century trustee
Given safeguarding pensions is a core priority for us, then it is only right that we increase our focus on the competency and capability of trustees and the structure of trustee boards.
Trustees, from professional trustees to member-nominated trustees, some of whom are not from a pensions background, are required to do an increasingly complicated job.
There are important questions to ask, and we have started to ask them with a view to developing a vision of what a 21st Century trustee needs to look like.
Over the summer we have listened to more than 800 trustees to better understand the challenges they are facing in the evolving pension landscape.
We will publish our initial survey findings in the next few weeks but far more analysis needs to be done. To support this, we have commissioned more research to explore certain areas further.
I can share some initial findings of the research with you, which show that, as expected, trustees of larger schemes are more capable when compared to smaller schemes.
Half of schemes report that all trustees meet our minimum standards for knowledge. But 14% of schemes indicate that no trustees meet them or haven’t even heard of our trustee knowledge and understanding code of practice.
When it comes to time commitment, on average, the amount of time spent by a trustee on their duties is nine days for small schemes, 12 days for medium and 16 days for large schemes.
Around half of small schemes see trustees spending less than five days on their duties.
We will spend the next few months looking at what additional support we can give trustees in areas such as training to enhance their skills and how they can improve outcomes for savers.
I want to have an open debate with the industry about what we all think a 21st Century trustee looks like, and how we get there, and you can expect this to be a theme running through our communications in coming months.
In early 2016 we’ll publish themed reports on what we’ve found out, what we’ve heard and what we think we can most usefully do to support these trustees.
Today I have focussed on our work to safeguard pension schemes by educating and enabling those of you who run them, and who I know are striving to deliver better outcomes for workplace savers in both DB and DC schemes.
And I have highlighted the debate on the need for more competent, more capable 21st Century trustees in the post-freedom landscape and as DB enters its next phase.
But one thing we at The Pensions Regulator must never lose sight of is that like the changing world around us, we need to evolve and adapt.
We need to be agile, practical and collaborative in order to meet the challenges of a rapidly changing pensions sector – and it may be some years before the ramifications of some of the recent changes we’ve seen become fully clear.
As you would expect, we are listening to the industry – and we are responding with simpler, more principles-based codes and guidance that reflect the unique characteristics of DB and DC.
And we are striving to communicate in ever simpler ways to meet the needs of new audiences who require a simpler style of regulation.
Over the coming months, we will be reaching out to the industry as we seek your views on developing areas such as the revised DC code and new guidance for DB schemes on integrated risk management and investment strategies.
And we will be looking to engage with you as part of our ongoing conversation on about trusteeship in the 21st Century.
I look forward to engaging with you in this process, and to the same lively debate which has made my first six months as CEO so interesting and challenging.