From direction to action: delivering change
Richard Knox, Executive Director of Strategy, Policy and Analysis at The Pensions Regulator (TPR), gave a keynote speech at the Pensions Expert Annual Conference.
Key points
- The direction of pensions reform is clear. By 2036, the ambition is a system delivering sustainable incomes in retirement through fewer, larger, better-run, value for money schemes. The challenge now is turning that direction into delivery.
- Don’t wait for certainty on every detail. Major reform never happens in a neat sequence. Those who act where the direction is clear, test their approach and raise practical problems early will have a headstart.
- Raise the standard of governance and treat data as a strategic asset. Make sure you have the capability and capacity for the decisions ahead, can challenge advisers, understand trade-offs and evidence your decisions. Know your data weaknesses, the risks they create and how they will be fixed.
- Start preparing now for value for money and default retirement plans. Review your data and services, challenge your investment strategy, understand members’ needs and consider whether building, partnering or consolidating offers the best route to default retirement provision.
- In the future, judgement matters more, not less. Better data and clearer rules give trustees better tools, but they cannot make difficult decisions for them. Good trusteeship still means understanding the evidence, challenging advice, weighing trade-offs and being prepared to change course.
Thanks for that introduction.
And it is great to be here today for what is my first speech as an Executive Director at The Pensions Regulator.
Last month Nausicaa set out why change is needed in the pensions landscape and why now is the time to act.
Emma Douglas, our chair, then talked about what reform needs to achieve for members.
Today, I want to focus on the next question: how do we turn that direction into delivery?
Introduction – lessons from experience
At the Treasury, where I worked for two decades, I covered everything from international financial services policy and trade agreements to ESG finance and banking.
And I cut my teeth in regulatory policy, tackling the major reset brought on by the lessons of the global financial crisis.
Those changes – including an alphabet soup of major European legislation such as MFID2 and EMIR – radically transformed how our capital markets are regulated.
Many were enacted in the face of significant debate on areas where reasonable people could disagree.
My experience of major financial services reform suggests implementation never happens in a neat sequence.
Legislation, rules, guidance, systems and market practice develop alongside one another.
And the organisations that adapt best do not wait for certainty on every detail.
They act where the direction is clear, test their approach, and raise practical problems early.
My experience also suggests that as policy-makers and industry, we won’t get it completely right the first time.
Conditions change and frameworks evolve.
And that’s a good thing, because it means, collectively we are listening and learning.
Lessons for pensions reform
This is easier when there is a very clear destination we are all aiming for.
And in pensions we have a broad consensus between politicians, regulators, and industry on what the next chapter for pensions in this country should look like.
By 2036, our shared vision is that people have a sustainable income in retirement.
With fewer, larger, better run, value for money pensions schemes.
A system that not only delivers good outcomes for members, but could also support growth in the UK economy too.
The government has set out an ambitious timetable for reform.
And we have provided further clarity through our regulatory roadmap.
In my remarks today, I will focus on how we plan to work with you to meet that timetable.
I’ll particularly focus in on raising standards of governance, delivering value for money, and enabling default retirement plans.
You'll see there is a thread running through all this: good quality data and data governance.
And my two takeaways from today are straightforward.
First – to succeed in this phase, industry cannot wait for every detail of the regulations to act.
Those who get started now – and engage with us on the process – will have a headstart.
And second – in all of this change, judgement matters more, not less.
Trustees will have more information, more options but harder decisions.
And regulation cannot make those decisions for you.
The fundamental responsibility of trustees remains the same: to exercise good judgement in the interests of members.
The reforms give you better tools for that job. They don't remove the need to do it.
Governance needs to improve
That is why I'd like to start by talking about governance.
The reform agenda will require trustees to make more complex and consequential choices.
Defined benefit (DB) schemes are considering how to deliver their long-term objective and deciding on the one hand, whether to consolidate via one of the new models now in the market or insurer buy out. Or on the other, to go it alone running-on and potentially considering the role of surplus.
Defined contribution (DC) schemes are preparing for value for money and retirement provision. And all schemes are working hard to get ready for dashboards and more sophisticated investment strategies.
The quality of governance, decision-making and data will be central to whether those choices produce good member outcomes.
Earlier this year we surveyed schemes to try to get a baseline measure of the quality of governance across the market.
We spoke to hundreds of trustees representing schemes of all shapes and sizes.
With thanks to my colleague Vicky Dyer for her work on this, I’d like to say a little about what we found.
The detail of which we published last week on our website.
We surveyed schemes’ governance and gave higher scores for better practices.
Documented processes on risk and controls, proper policies, good decision-making behaviours and effective challenge of external advice.
We then expressed their overall governance as a percentage score. Across the market we found an average of 62%.
Clearly, that is lower than we’d like it to be.
Members are highly reliant on trustee decision-making to achieve good outcomes, and the decisions ahead are becoming more complex, not less.
A governance model that was sufficient for yesterday's decisions may not be sufficient for tomorrow's.
The evidence from the data suggests that governance tends to be better where trustees are supported by wider expertise and resources – and practices are more formalised.
An experienced chair, leading a diverse board with a broad range of knowledge and skills, and access to appropriate external advisers.
Where conflicts of interests are identified and managed and where truly independent decision-making is upheld.
Governance and the case for consolidation
We also found a clear relationship between scale and governance.
Just one in four small DC schemes have formal governance arrangements in place.
While with large schemes and master trusts, it’s nine in 10.
This reflects that large schemes were more likely to have access to the right level of expertise and resources to focus on governance.
This trend supports the direction towards fewer, larger and better-run schemes.
But scale is not an outcome in itself.
It must translate into stronger governance, better services and better results for members.
So, what should trustees do now given the context of the reform agenda ahead?
First, they should review whether their board has the sufficient competencies to govern their scheme effectively in a fast-changing environment.
The range of decisions is widening because of reform and new options, and having expertise on paper is not enough if the board doesn't have the time or capacity to use it.
Those structures should make you operationally resilient: able to mitigate threats and anticipate risks, including the growing scourge of cyber.
But also able to capitalise on the exciting new opportunities that AI presents to improve services.
Second, you should test yourselves on whether you effectively challenge advisers and scheme sponsors, understand trade-offs and can clearly evidence why a recommendation was accepted or rejected.
Third, look beyond service-level agreements. See your scheme as your members experience it.
When members call – do we pick up? When members have an issue, is it resolved?
The right skills. The right challenge. And members’ interests driving service delivery. If you want to get ahead of the change to come, start now in these areas.
Governance: the importance of data
Of course, good quality data is the bedrock of governance, decision-making and service delivery.
If your data is weak, nearly everything else becomes harder.
That’s why government is proposing strengthening administration standards.
And it’s why improving the quality of data has been a collective focus over many years in advance of pensions dashboards.
By the end of last month, over 75 million records were connected.
That is a huge achievement. But connection is a milestone, not the end of the road.
Schemes still need accurate and current data, reliable matching and tested operational processes.
And across the board I would urge schemes to treat data as a strategic asset, not an operational afterthought.
Know your material weaknesses, the risks they create, who owns the improvement plan and how the board receives assurance that the data is improving.
If you do, you will have a head start in adapting in the years ahead.
Value for money (VFM)
I will now turn to value for money.
The value for money framework creates a statutory basis for a discipline schemes should already be applying: are investment performance, costs and services delivering value for members?
And crucially, the framework will drive transparency across the market.
Through this, we want to move the dial on returns.
Why? Because investment returns could contribute about two-thirds of the total value of a members’ pot at a retirement.
So if we want to fulfil our strategic objective of making sure people have a sustainable income in retirement, improving returns is a powerful lever to make that a reality.
We expect to see expert trustees who are confident in their investment proposition.
They should have the ability to consider all kinds of investments and build high performing, resilient portfolios.
We're working hard with the FCA and DWP to analyse consultation responses before DWP publish final regulations early next year.
And some in industry, through the £4£ initiative are already trialling a version of the framework to improve value, surfacing helpful issues at the same time.
But schemes don't need to wait for every detail of how the data will be measured and submitted, or what the final code and guidance says before preparing.
You can start now by:
- reviewing the data you already hold and identifying what might be missing
- improving the services people receive
- challenging your advisers on their investment strategy
- and planning for your first deadline thinking about who will prepare the assessment, challenge it and agree and manage improvements
And I do want to clear up a misconception I have heard from industry. That anyone below average will automatically be not value and there is no room for diversity.
We want a robust and consistently applied approach to the assessment.
But I want to be clear, value assessment is not just algorithmic. It relies on judgement based on objective data.
And it is not that we want to see all schemes operating in an identical way. We want there to be room for innovation, risk taking and differing approaches.
Those responsible for running their scheme will reach their own conclusions on how they best serve their members.
It will require, nuanced, empowered decision-making.
The framework should show trustees where their scheme sits, what stronger schemes are doing, and what needs to change.
For some, that may reinforce their strategy. For others, it might prompt a conversation about consolidation.
We will continue to engage on practical implementation, and our code will give more guidance on the assessment side of the VFM coin for consultation next year after the regulations are finalised.
This is also the start of the journey for VFM not the end.
Guided retirement will bring us the opportunity to evolve VFM to reflect and adapt to the changes we will see in how to turn pots into pensions.
Over the next year there will be plenty of chances to engage with us on the detail.
On 30 November, we are bringing together the Financial Conduct Authority (FCA) and industry experts from across data, software and technology to get under the skin of the practical barriers to implementing value for money from a platform perspective.
And if you identify a delivery barrier, bring us evidence, what the barrier is and what workable alternative would preserve the policy intent.
At retirement
The final area I want to focus on is retirement.
The purpose of a pension system is not simply to help people build a pot.
It is to help them turn savings into a sustainable income in retirement.
There are a range of options to help members in this task – annuities, drawdown, emerging retirement CDC, or combinations of approaches.
Each has benefits and trade-offs.
But most members wouldn't approach retirement as expert purchasers.
We have built a system where 24 million people now save into a pension, in large part because of inertia.
We then expect them to make complex financial decisions which could have ramifications for them over 20, 30 or even 40 years.
They may value security, flexibility and access to cash all at the same time.
And often what people say they want and what they choose in practice differs.
So effective defaults are likely to need to be based not only on stated preferences, but also on evidence about their needs and behaviours.
There is no imaginary ideal member.
Housing, health, family circumstances and other sources of wealth can all influence which default pensions are likely to work best for different groups of members.
We expect every DC scheme to be able to answer four questions:
- Whose needs is the proposition designed to meet?
- What evidence is used to understand members wants and needs?
- What does a good outcome look like?
- And how will you know if it is working?
The immediate strategic choice is whether building, partnering or consolidating offers the best route to offering default retirement plans.
And as you think about this please do engage with our joint consultation with Department for Work and Pensions and the FCA which is open until 22 December.
Your responses will inform a further technical consultation on draft regulations.
And a consultation on FCA rules, which is currently planned for later in 2027.
But my message today is that you don't need to wait for the consultation to finish before getting to work.
This means segmenting your membership, reviewing retirement journeys, assessing product options and strengthening governance.
TPR is changing
As a regulator, we are also changing, to support you to adapt to the market ahead.
You may have heard us talk about our move towards an outcome-focused, prudential style of regulation.
As the market moves towards fewer, larger schemes, we need to understand risk at both scheme and system level, engage earlier and target our interventions more effectively.
We will pay closer attention to the resilience of schemes and the market, the quality of governance and controls, and the evidence behind decisions that could affect large numbers of members.
Regulated audiences should expect us to ask not only whether a process was followed but:
- What outcome it was designed to achieve?
- What evidence informed it?
- What risks were considered?
- What would cause you to change course?
Conclusion
Before I finish today, I want to leave you with two thoughts.
First, although not every detail is agreed, the direction of reform is set.
The policy intent is clear and there is plenty you can do now on governance, data, value and retirement.
Second, better data and clearer rules will give trustees better tools - but they will not make the difficult decisions for you.
Good trusteeship will still depend on judgement: understanding the evidence, challenging advice, weighing the trade-offs and being prepared to change course.
And if we learn from one another as we implement these reforms, the prize is a pensions system that delivers better outcomes for millions of people.
That is how we turn direction into delivery. Thank you.
