Mark Boyle – Professional Pensions 2015
It is a little over 12 months since I became chairman of The Pensions Regulator and as most here will agree, it has been a year of unprecedented and far-reaching change in the pensions industry.
When I took over the role, we were on the cusp of a seismic shift in pensions culture – the movement to hand more freedom and choice to those who have diligently saved for their retirement. The movement to deliver better outcomes for retirement savers concerned by the historic performance of annuities.
At the same time, there was already an ambitious project to embed a new savings ethos by implementing automatic enrolment.
Preparing for such profound change has not been easy, but change we must. John F Kennedy said: “Change is the law of life. And those who look only to the past or present are certain to miss the future”.
Everyone has had to accept the need to adapt to the new landscape at a very challenging pace, and to be flexible in dealing with new reforms as they arise.
For our part, we are committed to making the recent changes work in practice and we are collaborating with the new Government, the new Pensions Minister Baroness Altmann, and with other agencies particularly the FCA, to achieve this.
We have been helped in this by the arrival in March of our new Chief Executive, Lesley Titcomb, who, thanks to her background at the FCA has had an immediate impact in terms of strengthening these critical external relationships.
I would like to spend the next 20 minutes or so outlining what we have been doing and how we are planning for the further challenges ahead.
I will start by covering our role in relation to automatic enrolment.
Automatic enrolment has its roots in a simple acknowledgment: millions of people are not saving enough for the income they are likely to want in retirement.
At the same time, life expectancy in the UK is increasing.
To address this, successive governments set about plans to make workplace pensions affordable for employers and attractive to workers with the introduction of the automatic enrolment programme, which crucially has cross-party support.
The regulator was given a statutory objective to maximise employer compliance with automatic enrolment duties. In order to successfully implement automatic enrolment, we’ve put in place a structured change programme and a specialist team of experts, which continues to grow.
To date, we are pleased at the high numbers of employers that have met their automatic enrolment duties with low opt out rates and very little need for us to use our statutory powers.
Over 5.2 million jobholders have now been enrolled into a workplace defined contribution (DC) scheme and approaching 50,000 employers have already automatically enrolled staff.
But there is much more to do.
While large and medium employers have now passed their staging dates, with compliance levels at the higher end of our expectations, they only represent 5% of the total number of UK employers.
1.3 million small and micro employers – that’s 95% of all employers – are yet to stage. We know there will be challenges with ensuring they get across the line.
By April 2017, when automatic enrolment has been fully implemented, the number of people newly saving or saving more in a workplace pension will have increased by around nine million.
For many small and micro employers, meeting their automatic enrolment duties represents a huge cultural change – the first time they have provided a workplace pension scheme to their staff.
Communicating in the right way with these organisations – the shop keepers, the landlords, the plumbers – has been and will continue to be fundamental to the ongoing success of automatic enrolment.
We have spent a great deal of time researching and understanding the behaviour of this audience, and making our language and communications as simple as possible.
We have made considerable use of behavioural insight or ‘nudge’ techniques.
We are working with the Behavioural Insight Team, which has now spun out of the Cabinet Office, which, based on in-depth research, is inputting directly into the way we communicate with small and micro employers.
The reality is that many of the smallest employers are not organisations at all. They are individuals who happen to employ someone – it could be a nanny or a carer.
In practice this means using language in our communications that the smallest employers (we have called them the ‘micro micros’) can identify with, and presenting it in a way that is both informative and authoritative. We have recently written to every single small and micro employer, 1.5 million in total, to tell them exactly what they will need to do to start meeting their automatic enrolment duties and what assistance is available to them.
Our ‘all employer’ letter is followed by further ‘nudge’ communications, both posted and via email, as employers get close to their staging date, at 12, 6 and 1 month out. And we continue to communicate with employers after they have staged.
The enabling tools we offer small and micro employers are in the shape of new easy-to-follow online step by step guides, videos and FAQs, as well as a dedicated customer support team. We also now intend to further simplify the process for employers who employ a small number of staff but none of whom are eligible for automatic enrolment.
We have close relationships with a wide range of employer and professional bodies – an example of just one would be the Institute of Certified Bookkeepers – whose members will support employers with their automatic enrolment duties.
We know that 70% of the smallest organisations are likely to use a bookkeeper, accountant or payroll bureau to help them to prepare for automatic enrolment and so we have been working in partnership with these organisations to communicate our messages to their members.
We are using a diverse range of channels, including various forms of media, to reach those who until now were not aware of The Pensions Regulator, let alone how they will play their part in this savings revolution.
Indeed, our head of automatic enrolment, Charles Counsell, recently set a new TPR record by delivering about 25 regional radio interviews in one morning – evidence of how we are working to engage the small and micro community.
We are listening
It is important that we also listen and review our communications in response to feedback.
For example, one area where we changed our approach is our communication to employers of carers. The first letter they receive from us no longer refers to our enforcement powers as this message was found to be rather intimidating to this audience.
This message is now reserved for later correspondence when employers are further through the process. We do still feel that it is important that they understand the potential consequences of not complying, and receive this additional nudge.
But we recognise that we can do still more to simplify our messages.
We are calling on businesses to follow our guidance and to plan early. We are here to help and stand ready and resourced to do so.
But while our priority is to engage and educate employers, we also have a statutory duty to enforce where businesses fail to comply.
As we deal with smaller employers, we will see more who, despite our message to prepare early, leave it too late or do not comply at all. Non-compliance is not acceptable.
That’s why we have been given these powers and where appropriate we will use them.
Freedoms, flexibilities & public service schemes
I would now like to turn to defined contribution and the implementation of the Government’s Freedom and Choice Agenda.
I know it’s hard to believe – but I myself am approaching my fifty fifth birthday.
That means – like thousands of others – I will also soon be eligible to take advantage of the new pension freedoms introduced in April.
Much has been written in the past few weeks about the rate at which people are seeking to exercise these new freedoms, what the freedoms mean for both members of DC and defined benefit (DB) schemes and their ability to access funds when they want to.
We are working with Government, the FCA and the wider industry to make the pension freedoms work in practice in the interests of members. As part of a ‘road trip’ of engagement, we are currently visiting occupational schemes to gather evidence on how they have adapted to the changes and the degree to which they are offering or planning to offer the flexibilities to members.
We do appreciate that trustees and scheme managers have had to cope with enormous change in the shape of these reforms.
We are therefore focused on producing simple and informative guidance that makes clear what trustees are expected to do.
We have published essential guides on how trustees should clearly communicate to members their options to take flexible benefits. This is the right to enjoy the freedoms as set out by Government.
These guides highlight the need for trustees to point members to Pension Wise guidance, or towards FCA-regulated advice, to ensure they are fully informed before drawing down savings.
Risk warnings / second line of defence
We realise that some trustees are concerned about straying too close to giving financial advice – about ‘being on the hook’.
This is why we are recommending that trustees give generic warnings – the so called ‘second line of defence’ warnings – about the risks that should be considered by members when choosing how to access their pot.
Many of you will have followed the debate about the different nature of the risk warnings we have recommended trustees use, compared to the specific risk warnings which the FCA has recommended.
On that issue I can say this.
TPR and the FCA share the common goal of providing high levels of protection and good outcomes for retirement savers. We expect trustees to act in the best interest of members in the same way as the FCA expects pension providers to ensure that customers are treated fairly.
We are working increasingly together with the FCA to ensure member outcomes are not adversely affected by the differences in the regulatory regime. It is this close alignment that has allowed us to limit any regulatory gap between the two organisations.
However, it is the difference in the roles and responsibilities of a trustee from those of a provider that have led to a different approach to risk warnings. Trustees look after scheme assets on behalf of all of the members collectively, rather than having a direct commercial relationship with each member, as a provider does.
These differences are driven by the legislation that applies to trustees on one hand, and the legislation and FCA rules that apply to providers, on the other.
For the larger DC schemes and master trusts that plan to offer the full suite of draw down options to members, we are discussing with DWP and the FCA whether our guidance to these schemes should also be to offer specific risk warnings, which would be as similar as possible to the FCA’s ‘second line of defence’ for providers.
The industry would of course be consulted on any proposed change in this area.
The key thing is that – whatever the regulatory structure – we as regulators and related agencies work much more actively and collaboratively together in a demonstrably joined-up way.
Refreshing our DC code of practice
We pointed out earlier this year that DC is becoming the dominant form of pensions, driven in part by the introduction of automatic enrolment.
Annual research we published in January revealed that there are now more ‘active’ members in DC schemes – more than three million – than in DB, with 1.3 million, although the total assets in DB schemes continues to far outstrip those in DC.
Our role is to ensure that all DC schemes, regardless of size, are well governed, offer good value for money and, crucially, deliver quality outcomes to members.
Last month we published our latest research on how DC schemes are embedding the quality features outlined in our DC code of practice.
It is clear that master trusts and larger DC schemes have a much greater understanding of the features than smaller schemes, and a much stronger record of reviewing their governance processes against the features.
New legal minimum governance standards came into force for DC schemes in April – and we have seized this as an opportunity for a wholesale review of the DC code to ensure it helps trustees to meet the new requirements, whilst making the code as short and simple as possible to apply.
We kicked off engagement with the industry a couple of weeks ago with a very productive workshop involving 25 organisations and these discussions will continue over the next few months as we prepare to formally consult on a revised code. We are committed to producing simple, clear guidance to assist schemes with the amount of change they are having to contend with.
We will use educational campaigns and direct engagement with schemes to promote the standards now set out in legislation, and address any weaknesses uncovered in our survey work.
But where schemes continue to fall short, we will consider enforcement action.
Amidst all the changes in the DC landscape has come an evolving threat of pension scams.
While the new freedoms are bringing unprecedented choice for many, scammers are lying in wait and are changing the way they target their victims.
This is a very real threat. Some in the industry estimate the amount lost to pension scams to be more than a billion pounds.
Before April, people under 55 were being scammed into releasing their pensions early based on promises of tax-free cash and extra – ordinary investment returns.
Now risk has moved to those aged 55 and over who are using the freedoms to access their savings, and who may be vulnerable to the lure of bogus investments.
The best way to tackle pension scams is to raise awareness of the dangers, both among the industry and consumers, to help them spot a scam and report it to Action Fraud.
Our scorpion awareness campaign is making a difference in the fight against scams, and we’ve recently updated this to take account of the new pension freedoms.
We’re working with a broad taskforce of government, regulators, financial services bodies and criminal justice agencies, including HMRC, the FCA and the National Crime Agency, to highlight the threat from scams.
We have also used our enforcement powers where necessary. We have appointed independent trustees to more than 100 schemes to prevent further funds being lost and we have applied to the courts to freeze assets in 20 schemes.
We have put a stop to five connected pension ‘liberation’ schemes that received transfers totalling more than £130 million from over 1,400 pension holders. And we have banned certain people from acting as pension trustees.
But there is more to do.
Pension scammers are what our CEO Lesley calls 'shape-shifters'. One example is a migration of scams towards small self-administered schemes. We have to be tenacious and agile to beat them.
Scams awareness month
Today is actually the start of Scams Awareness Month, an initiative led by Citizens Advice and trading standards to highlight the various types of scams, including pension scams.
Week one will focus on pension scams and throughout this week we and our partners will be using social media and direct communications to support the campaign by repeating our call for people to be vigilant.
Elsewhere, we have an expanded role to regulate the governance and administration of more than 200 public service schemes with assets of £226 billion, and more than 13 million members.
In April this year, we published a code of practice and regulatory strategy to educate and enable scheme managers and pension board members to comply with new legislation.
And last month we published our compliance and enforcement policy which details how, if necessary, we will use our powers where schemes do not comply.
We next plan to carry out a survey this summer of public service schemes to baseline current governance and administration standards and to enable us to benchmark improvements year on year.
Turning now to the challenges facing defined benefit schemes.
Our Annual Funding Statement published in May acknowledges that many schemes are likely to experience larger deficits due to persistent low interest rates, caused by quantitative easing and a range of other factors.
But it also makes clear that a more flexible funding regime as set out in our DB code of practice enables those schemes with capacity to take additional risks to tackle deficits by altering their funding strategy appropriately, by making changes such as a modest extension to their recovery plans or a modest increase in deficit repair contributions.
New growth objective
TPR has always believed it is important to have strong employers supporting schemes. Our new objective to minimise any adverse impact on employers’ sustainable growth should give further confidence to employers that supporting DB schemes is not a barrier to investing in their own businesses.
We have made the need to strike a balance between the requirements of schemes and those of employers a core principle for the revised DB funding code.
To further support understanding of the DB funding code, later this summer we will publish straightforward information for sponsoring employers with the aim of encouraging greater engagement with the funding of their scheme.
We will also be publishing practical guidance for trustees on how to assess the sponsoring employer’s ability to support the scheme, an integrated approach to managing risk, and to setting an investment strategy.
Using our powers
However, we will continue to use our anti-avoidance powers if appropriate in line with our objectives. Many of our interventions are hidden from view but I can share a few examples.
Last month we published details of a case, where following a lengthy investigation, an £8.5 million settlement was reached between the regulator and two businesses domiciled in Russia, while a contribution notice of more than £380,000 was issued to a third individual.
At the larger end of the spectrum we have played, and continue to play, an active role in legal actions arising from the insolvency of the Nortel group in which a recent court ruling held that 33,000 UK pensioners were to receive a pro-rata share in the group's $7.3 billion assets.
And last year, after nearly six years of investigation and legal proceedings with the Lehman Brothers pension scheme, an estimated £184 million settlement agreement was signed – the largest sum paid so far to a scheme as a result of our actions.
So, to conclude, it is 10 years since The Pensions Regulator was established, and we are continuing to refine our approach to the landscape we regulate.
We know for certain that – like the landscape around us – The Pensions Regulator has to change.
We are adapting to the most fundamental and radical reforms for generations.
We are listening to what the industry is telling us and we are responding by developing new and evolving policies and guidance to educate and to enable.
We are communicating in ever simpler ways to ensure our audiences understand what is expected of them and to provide help where we can.
We are speaking with a clearer and where appropriate, louder voice.
But where we choose to use our powers we will do so decisively to ensure compliance with the law.
Above all, we are working to a common goal.
By striving to ensure that pension schemes are fundamentally well-managed, we are supporting the Government’s vision of a new and lasting savings culture.
A culture in which members receive the contributions they are due, and, subject to appropriate safeguards, are able to exercise choice as to when they access their pension.
This is a vision that we believe will achieve the goal of inspiring confidence and encouraging participation amongst future generations of retirement savers.