Innovation in the new pensions era
A speech by Nausicaa Delfas at the JP Morgan Pension and Savings Symposium
Key points
Our pensions vision is to generate a sustainable income in retirement.
To succeed, we all need to align behind that vision, and for the market to innovate in response:
- For defined benefit (DB), that means innovation in endgame.
- For defined contribution (DC), it means innovation in terms of investments and default retirement plans.
- Across both it means strong governance standards, effective administration and innovation through data and artificial intelligence (AI).
And we at TPR are continuing to regulate differently in this era, moving from individual scheme oversight to system wide oversight and reducing unnecessary burdens on schemes.
Good morning, everyone. I am pleased to be here today to talk about the role we all need to play in reshaping the pensions market, into a new era.
If a 25-year-old auto-enrols into a pension today, their first contribution may not be paid out for 40 years. Think about what the world looked like 40 years ago, in 1986… No internet economy; no smartphones; the FTSE was about a fifth of today’s level. So, designing regulation for pensions means regulating for a financial promise that must survive technologies, governments, economic cycles and crises that we cannot yet imagine, not an easy task, but together it is within our grasp.
Over time, policy interventions have shaped the pensions landscape:
- In the 1990s policy action protected members of collapsed schemes and set us on a path to improved funding positions for DB schemes.
- In the 2000s, automatic enrolment transformed retirement saving in the UK. More than 22 million people are now in a workplace pension, a major public policy success and a strong foundation for the future.
- And in the 2010s authorised master trusts were created to ensure that the influx of new savers were in schemes that were well governed.
Yet today, the job is not done: there are still too many people – 14.6 million – under saving for retirement.
Our vision is of a system which gives people a sustainable income in retirement, provides security and value for all and supports UK prosperity more widely.
The current programme of reform reflects this challenge.
With the Pensions Schemes Bill and the Pensions Commission, we are moving out of one era and into another.
We can’t go back to an era where the image of retirement was a gold watch and a handshake, but we can create a future where people benefit from better performing schemes, with more transparent information, with clear default options at retirement.
To achieve this, all of us have a role to play:
- Government – with its reform agenda, setting the market towards fewer, larger well-run schemes.
- Regulators – not just protecting savers, but working to enhance the pensions system and support innovation in their interests.
- Pension schemes – with a renewed and refreshed focus on delivering the best possible long-term outcomes, supported by strong governance, administration and data.
- And you, as innovators, helping to deliver value to savers from joining a scheme right through retirement.
My ask of you today is to recognise that we are moving towards a new pension system, and to recognise that we need your help to deliver it by bringing the right products and services that pensions schemes demand.
No one in this system can achieve this alone. But if we act with common purpose, a sustainable income at retirement for all is within our grasp.
And innovation is required across the marketplace, in DB, DC schemes and in our regulatory approach.
So, taking each in turn.
Innovation in options for defined benefit (DB) pensions
In the defined benefits landscape, funding surpluses are creating new opportunities.
While most DB schemes are closed to new members and their trustees are considering endgame options, over 9 million savers rely on them for their later life security.
Collectively they hold a trillion pounds, and today, there are more options in endgame than there have ever been before.
With half of schemes fully funded on a buyout basis, and surplus above this level of around £90 billion, it is unsurprising there is commercial interest.
In this environment, it is up to trustees and employers to make the right and sensible decisions which will deliver the best possible outcomes for their members and their scheme.
And that is not a uniform choice.
Different segments of the market will be thinking about their endgame in different ways.
We want to see products and services emerge to serve them – and this is where you can help too.
There are a number of broad archetypes in the market.
A significant number of well-funded closed schemes will want to prioritise security.
These schemes will often look to insurer buy-out.
They will now, often, have the choice of where to go. We expect those trustees to negotiate the best possible offer with insurers to generate the best possible outcome for their members.
Another segment, of well-funded large schemes, are prioritising running on, to create and extract surplus to be used to improve member benefits or potentially unlock investment into economic growth. Many will need support in doing so.
And there will be a number of schemes which cannot afford buyout. Here superfunds may be a good option to provide scale and security, which will benefit members.
Each of these segments presents a different kind of opportunity. Market players may ask: what new models, products, and services might trustees and employers in each segment need to deliver the best possible outcomes for their members?
It is not for us to tell trustees what the right decision is. But we will help them in their choices.
We will publish guidance in early May to highlight to trustees the factors they should consider when releasing surplus. And ensure that they follow the highest standards of governance in making their decision through our supervisory approach.
Innovation in DC – value for money
In defined contribution schemes, our mission to get better outcomes for savers depends on high-quality investment governance and decision-making.
For too long, we’ve had employers picking provision, and trustees guiding strategy, based on cost.
The value for money framework will enable decision-makers to look beyond cost, to investment outcomes. I was speaking on this a couple of weeks ago at the OECD, and its importance was recognised in that global audience.
In workplace pensions, it gives trustees the transparent tools and data to really deliver in members’ best interests in line with their fiduciary duty.
The inclusion of a forward-looking metric in the framework will enable schemes to consider a broader range of growth investments.
The rationale for the value for money framework goes to the heart of our mission to improve outcomes for savers: because moving the dial on returns matters.
For the average saver who started saving at 22, a 1% improvement in investment returns over the lifetime of saving would mean a 30% bigger pot.
And as a whole, better value for money has the potential to deliver almost £20 billion worth of benefits over the next 10 years, with the lion’s share going to savers.
So please think about how you can support trustees as they strive for more.
In advance of the value for money framework, we are currently undertaking an asset allocation exercise.
We have worked with Master Trusts to better understand their self-reported asset allocations and return data, which will help identify emerging trends across the market. By doing this now, we can avoid significant changes when the framework becomes operational, minimising unnecessary burden on schemes.
Innovation in investments for DC
Pensions schemes will also need a pipeline of long-term growth assets in which to invest.
The Mansion House Accords and Sterling 20 have been welcome initiatives from industry to consider how to invest in UK growth assets.
The government’s industrial strategy also presents opportunities for pension schemes to invest over the longer term in growth sectors, such as science and technology. This could be an exciting opportunity to invest in ways that not only do well, but could do good at the same time.
Over the last few months, we have been engaging with a wide range of industry stakeholders to understand the barriers and appetite for private market investments, including UK-based infrastructure.
Familiar challenges emerge: platform limitations, valuation and j-curve issues, and liquidity all loom large, and some private market investment vehicle fee structures continue to be barriers, in terms of both level and transparency.
But many stakeholders are recognising that these kinds of assets have the potential to deliver competitive risk-adjusted returns while driving economic growth, and with opportunities for direct social impact.
And we are seeing real shifts in strategic asset allocations of master trusts – our engagements with them indicate that we may be moving from a world where private markets made up around 2-5% of the allocation, to somewhere between 10-30%.
And to help, later this spring we will be publishing our report on this work, so that trustees and expert advisers can benefit from the insights that we have gained and government can understand the kind of investment opportunities for which schemes have appetite.
Innovation in default retirement plans: guided retirement duty
Innovation in default retirement plans can also deliver better outcomes for savers. We know that only one in five have a plan for how to access their pension and people need help and support in this incredibly complex decision.
Defaults in accumulation have been a great success – we have seen how powerful they are as most savers use them to build their pots, without needing to make a decision.
We can apply that lesson to guided retirement – the primary legislation requires that defaults must provide a regular income through the whole of retirement, but is not prescriptive about how this is achieved.
So in advance of the new duties, trustees will be thinking hard about their options, such as whether: To pool or not to pool; when to flex and when to provide certainty.
There are a range of potential options – but these must be simple for the saver to understand and enable them to be confident that the default is right for them.
The saver landscape is complex, and I would urge industry to consider whether there are defined cohorts of savers who share risk characteristics and how they can be supported. Modest differentiation of defaults and glidepaths could make a real difference.
Let me illustrate this point: many people face persistent barriers to building secure retirements – from varying work patterns to low or irregular savings. And we know there is a gender pensions gap – which is 48% – far higher than the 7% gender pay gap.
So consider those who have taken a career break, often women caring for children: we have seen that if that break is taken within the first 10 years of their working life, they face the prospect of a pot size around 16% lower because these breaks remove contributions at the point where they would otherwise likely have the longest exposure to risk and returns.
And understanding housing tenure and cohabitation may be similarly important to understanding what people want and need in retirement.
So as defaults propositions evolve, schemes might ask whether, for cohorts such as these, they should offer cohorts different glidepaths with different expectations for risk and return, perhaps de-risking later to make up part of any shortfalls?
They might also consider new types of products and services to meet the needs of these easily identifiable cohorts.
Retirement-only CDCs will also be part of that conversation, in line with the government’s intention to bring forward legislation later this year – we will support new market entrants that have the potential to deliver better returns and outcomes for members.
Innovation in administration, data, and artificial Intelligence
Our regulatory approach is increasingly focused on governance, administration and data standards.
A modern pension system must place administration on an equal footing with investment and funding: greater investment returns will not benefit savers, if the administration is poor and they get the wrong pension, or if they are more vulnerable to operational failures, cyber-attacks or scams. We want schemes to move to a norm where they invest in good quality administration and see administrators as a strategic partner.
We expect trustees and scheme managers to remain accountable for the quality of administration and hold providers to account.
There are persistent challenges: legacy systems, uneven investment, inconsistent data quality, and variability in performance.
Pensions dashboards will bring a huge focus from pensions savers on the money that you have been stewarding for them, and the information they receive has to be right.
Industry is ripe for innovation – but to succeed, it has to have solid foundations of strong governance, administration and data.
That is why these remain top priorities for us in the coming year and beyond.
We welcome industry innovation. We launched our innovation support service last year specifically to make it easier for industry to engage with us. Areas of interest so far include administration, emerging models, guided retirement, and member experience.
We recognise the future is already here – and we are likely to see extraordinary strides forward in technology, particularly AI. Our approach is outcome-focused and technology-agnostic, focused on member outcomes.
There are clearly opportunities with the safe adoption of AI, but there are also new risks – such as around the advice/guidance boundary, digital inclusion, and fraud. Trustees will need to balance these. We will continue to work with the FCA to ensure a joined-up and consistent regulatory approach to AI across workplace and personal pensions.
We expect to publish an AI action plan outlining our approach in May, and report annually on progress after that.
TPR regulating differently in this era
The need to innovate does not just apply to you. It also applies to us.
In the past, we were more focused on risks at scheme-level and compliance with the rules. After all, in a DB world, compliance with funding rules meant members received their promised benefits.
Compliance still matters. That’s why we make sure employers enrol savers into a pension. For example, we have maintained a 97% compliance rate with AE duties, even while applying greater process efficiencies and reducing cost to employers; and have taken action to recover over £900 million of late contributions back into pension schemes since 2012.
And it is always important to have a lever to pull when harms occur. That is why the Bill expands our powers to enforce against the upcoming requirements, and we will continue to apply a proportionate and risk-based approach when using them.
But a compliance-orientated approach is no longer enough.
To do what we are asking other stakeholders to do – build a pensions system which improves outcomes for savers – we are evolving our prudential-style approach.
We no longer just look at the actions of individual funds and schemes.
We also look outwards to risks to the system as a whole, its solvency and sustainability, working with the Bank of England, FCA and other regulatory partners.
We look more widely at the macroeconomic environment, and more holistically for risks arising from the relationship between the different entities within the market.
And we will seek to reduce unnecessary regulatory burden where we can.
That is why today I am pleased to announce new guidance for DC master trust reserving. This will help schemes to use the most efficient mix of assets to meet their capital requirements, and enable some to safely reduce the level of cash reserves they have, unlocking investment for more productive purposes.
Conclusion
So to summarise.
The norms we set in the coming years have the potential to shape the next few decades.
In this era, our focus is on achieving our vision of a system that provides security and value for all, delivers better member outcomes, and does so in a way that supports growth.
Over the coming years, new market demands will emerge to achieve this, and my ask is that you engage with this and innovate:
- for DB, that means innovation in endgame
- for DC, it means innovation in terms of investments and default retirement plans
- across both, it means appropriate governance, administration and use of data
Our vision is that everyone has a sustainable income in retirement. That vision may be ambitious. But it is also entirely achievable.
And the prize will be millions of people enjoying richer, more dignified lives in the years to come.
Thank you.
