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David Fairs' speech at the PASA Annual Conference

Tuesday 11 February 2020

Introduction

Good morning. Thank you for inviting me to be part of your day.

I’ve been invited to speak about governance and the importance of administration today.

I feel sure I’m preaching to the converted when it comes to the vital importance of both.

But it never hurts to remind ourselves of our responsibilities. And it’s always good for me to have an opportunity to thank you for what you do.

So thank you! Thank you for your diligence, your commitment, your attention to detail, your care, your concern for savers, your accuracy and your thoughtfulness.

Shifting landscape

The pensions industry is in the midst of massive change and flux.

I can’t count the times I’ve talked about ‘the shifting landscape’.

There is a lot that is changing. Before I move onto the specifics of today, it's worth noting a few of the most recent changes.

We have a new Chair of the Work and Pensions Select Committee.

I know.

It’s an odd place to start. But it’s a reminder that pensions and politics are inextricably entwined. And that we are all - ultimately - answerable to some powerful people.

The new Chair is Stephen Timms. I can share a little internal gossip from The Pensions Regulator (TPR) and tell you that our Parliamentary Affairs Officer - yes, we do have one - is thrilled.

I don’t know whether that’s because she thinks Stephen is a good sort or that she’s expecting fewer letters asking us to explain ourselves.

The Pensions Bill is continuing its way through Parliament. We’ve been involved with the Bill since its inception; advising, guiding and lobbying. We are pleased with the proposals it contains. Especially those that relate to strengthening our powers and oversight.

Powers to act, prosecute, even imprison are a great deterrent to those seeking to play hard and fast with the rules or savers' money.

We continue to work in partnership with fellow regulators to combat scams. We raise awareness of the potential for savers to fall for a scam. We pursue illicit and illegal activity and we’ve successfully taken action.

Last year Kim Brown came to your annual conference to speak about master trust authorisation.

At the time it seemed everyone was interested in how it worked, what it meant and what they needed to do.

This was heartening for us. It could so easily have been the case that people weren’t interested, or didn’t know what was happening.

I’m delighted to say; the whole exercise feels so ‘last year’ which of course it was. But it’s an object lesson in demonstrating how quickly things move on. How the extraordinary becomes ordinary.

And how we all adapt to change. Things that feel new, strange or even uncomfortable soon become everyday, part of life, business as usual.

Future of trusteeship

Yesterday I launched our formal response to the consultation we ran last year on the ‘Future of Trusteeship and Governance’. We wanted to look at ways of helping trustee boards do their job to protect savers.

We also wanted thoughts about what to do about those boards or individuals who won’t or can’t do their jobs properly.

Our response to this consultation will further change the way we all work.

We received more responses to it than any previous exercise. This was encouraging. We feel it demonstrates a level of genuine interest and concern.

It’s important to us that any actions resulting from this consultation are workable in the real world.

We made great efforts to listen to all opinions offered. Our policies and guidance are most effective when they reflect the breadth of thought from all stakeholders.

A fundamental point emerged. Something that respondents raised repeatedly.

The majority agreed that all savers deserve to be in a well-run scheme that offers value for money.

That may sound self-evident. But the behaviour of some had led us to wonder if this was the case.

I’d encourage you to take a look at our response. It’s available on our website.

Like me, its compact and easy to read.

In acknowledgement of my time and the limits of your patience I’ll pick out just a few areas. But please do take a look at the full document.

We broke the consultation into three sections. I’ll keep my thoughts to each of these.

The first was Trustee Knowledge and Understanding (TKU). We asked about this alongside questions about skills and ongoing training.

In response to the consultation, we’ll be conducting a review of our code of practice so that TKU better reflects contemporary issues. We’ll incorporate expectations set out in the 21st Century Trusteeship campaign.

And we’ll simplify how we present our TKU expectations. Differentiating by trustee role and scheme type.

Single code

We’re consolidating our 15 codes of practice. A new single code will be simpler and easier to digest. It’s our intention that it becomes better understood, shared and appreciated.

The new code will include topics like Environment and Social Governance (ESG).

We want to make the whole code easier to use. There will be a search facility and improved design.

We’ll look at whether to set expectations for ongoing learning. We might set an indicative number of hours that count towards learning.

Professional trustees will be expected to follow the industry-based standards on ongoing learning; currently set at 25 hours a year.

We know that many of you like and rely on the Trustee toolkit. We also know It can be cumbersome and needs updating. We plan to review it over the next couple of years. And make the content more relevant.

And we’ll work on helping trustees to put theory into practice.

Employer duties

We learned that some trustees are not provided enough paid-time to properly execute their duties.

By law they should be given this time by their employer. We’ll be running a targeted employer campaign to remind employers of their duties.

Board diversity

The composition of boards is important. Research shows that the more diverse the make-up the better the outcomes for savers.

We asked how we could create more diverse trustee boards.

We think it would be beneficial to create an industry working group to help pension schemes - as well as employers and sponsors - improve the diversity of their boards. Initially, TPR will chair this group, with a view to others taking on the role as work develops.

We believe that if schemes are required to report on the steps they’re taking to improve diversity, it will have a positive impact.

We intend to work with the Department for Work and Pensions (DWP) to find a means of encouraging schemes to publish their work on board diversity.

Professional trustees

We asked about the notion of having a professional trustee siting on every board.

Unsurprisingly this provoked some strong responses.

We don’t believe it’s currently feasible to require a professional trustee to sit on every board. Even if we did, there simply aren’t enough. Most respondents agreed with us on this point.

With the exception of some professional trustees.

For the time being this is an area we are content to monitor.

We’ll evaluate the impact new APPT standards and accreditation have on the quality of professional trustees. And assess the impact of other proposals on the standards of governance and trusteeship of pension schemes.

We’re not planning to make changes to the way we regulate schemes using the sole trustee model, although we’ll continue to scrutinise those schemes.

DC consolidation

Our final section was about defined contribution (DC) consolidation. All I want to share with you today about that is that we’ll continue to encourage under performing small and micro schemes to consolidate.

That’s a whistle-stop canter through our response. Do take some time to read the online version. Though the formal consultation is over, we are always in listening mode.

Administration

Having said that. I’ve got more talking to do and I’d like to talk to you about administration itself.

TPR has a statutory objective to promote good administration.

In recent years we’ve been increasing pressure on trustees to pay administration the attention it deserves.

For too long it’s been a 'Cinderella' issue. Overlooked, considered less important than other obligations or wilfully ignored.

Digitisation, the demand for instant access, the necessity of clean data, the need for accurate records; all these are putting an increased focus on administration.

We’ve asked trustees to account for the quality of their data in their scheme return. We’ve placed a strong focus on administration in our supervisory relationships.

But trustees are only one half of the equation - good pension scheme administration relies on the provision of high standard, robust administration services. However they are procured.

Administrators play a critical role in ensuring good outcomes for savers, and in securing confidence in pensions systems. For most savers, they are the face of pensions.

Over the next couple of years, we will be looking to build strong relationships with a handful of strategically important administrators, in the way we have built relationships with strategically important schemes in relationship supervision.

Administration is highly concentrated. By working closely with a handful of strategically important administrators we think we can improve outcomes for millions of savers.

Identifying risks

This is a new approach for us - and for you.

By engaging directly with administrators, we feel we can better understand the issues facing these (such as capacity constraints) and identify risks which impact multiple schemes.

We are going to risk assess the top 75 administrators in the UK. To identify strategically important administrators, with whom we want to build one-to-one relationships.

Engagement will be focussed on particular areas depending on risk and priority, but could include:

  • trustee relationship management
  • handling the transition of clients (schemes) both into and out of the administrator
  • data quality controls
  • scams due diligence
  • member communications and engagement
  • systems and automation
  • administrator resourcing and training
  • business continuity / cyber resilience

We’d expect to hold regular meetings to discuss our focus areas and set expectations.

This will be an opportunity for administrators to raise concerns, hear about our priorities and develop relationships.

We have no formal powers over administrators. But it shouldn’t take formal powers to work together. This as much about developing relationships as it is about re-focusing administration.

We’d like administrators to engage on a voluntary basis. We have no means to compel. We have no desire to compel.

We do know there is a desire to improve things and to increase the understanding and value placed on administration.

We will work collaboratively with administrators, trustees and regulatory partners such as the Financial Conduct Authority (FCA) and Information Commissioner's Office (ICO) if we discover issues that need attention.

PASA already has its own high standards. The Pension Scams Industry Group (PSIG) code of practice is recognised as a useful tool. We are not looking to undermine or replace existing rules.

We welcome the work done by the administration industry to date to define and promote high standards for its activities. We will continue to support it.

The standards in place provide us with a useful starting point against which to assess administration practices, and any we would look to feed back any lessons learnt from our engagement to the industry.

As in many areas of our work, we are looking to increase our scrutiny. We want to develop closer, better relationships so we can work with people to make improvements.

We place a great deal of value on administration and I hope this approach demonstrates that.

Pensions dashboard

Before we move to questions - and I’m happy to take questions on anything I’ve said - a few words on the Pension dashboard and the new defined benefit (DB) funding code.

If I look at my phone it seems there’s an option for a new app appearing every day. The slow, steady hand of government feels quite at odds with the development of a widget designed to put everyone in closer contact with their savings. But we are moving forward.

Aspirations as regards the dashboard are contained within the Pensions Bill. We welcomed the Government’s commitment that providers will be required to take part in the dashboard project. We are sure that members of the industry will rise to the challenge by working to deliver on it.

We are working with the DWP, the FCA and the industry-led delivery group to develop the regulatory framework that will maintain an effective dashboard and protect consumers. We are also working with the industry to understand the challenges that must be overcome for the dashboard to achieve its aims.

I saw on a bus shelter this morning an advert from an online pension provider for an advert for their phone app. It might be that commercial providers steal a march in terms of offering a similar service. However, the data, scrutiny and regulation required for a national pensions dashboard will take time to develop.

DB funding

To conclude. A few words on the DB funding code. We will be launching a consultation next month.

The government’s white paper on DB funding said that the current approach has room for improvement and clarification.

The DB landscape is shifting. Over 70% of DB schemes are cash flow negative, with benefit outgoings exceeding contributions. The new code should reflect this.

We know that schemes could find financing their scheme a challenge.

Especially if they are paying full benefits, have a deficit and they are reaching a high state of maturity.

Many schemes that closed in the eighties and nineties now have members who are at least in their late forties or early fifties. They need to acknowledge the fitness of their scheme.

We began to address this in our funding statement. Many of you will have noticed a shift in emphasis, and a focus on having a long-term strategy.

We also need to address the fact that a small number of employers and schemes push the boundaries of the current system. On occasion abusing the available flexibilities.

The lack of clarity, particularly around the definition of 'prudent' and 'appropriate' was also causing confusion, and ultimately putting savers’ pensions at risk.

The new code will address those factors. It’s been developed in concert with industry practitioners.

Many of those representing small organisations said they didn’t have the resources or inclination to spend a lot of money on advice trying to meet TPR’s requirements. They said it would be far easier if we just told them how they wanted us to measure technical provisions, how much they should pay, and over how long.

But the other half, mostly representing larger employers, said they really valued the flexibility in the system.

To some degree the new funding code will enshrine some of the best practice that we already see in better governed schemes across the market. It will set a clear marker for what prudent and appropriate looks like from our perspective.

But it also gives schemes a choice. Those that want a prescribed approach will have one. And those that cannot or choose not to go down that route will be able to continue to use some flexibilities in the system.

Those schemes that abuse the current flexibilities in the system are likely to find life much more difficult.

We’ll be making sure funding plans are appropriate and sustainable. Both for the scheme and the employer.

To get this right we need input from as wide a range of stakeholders as possible.

The first consultation will launch early next month and will focus on options for a clearer framework for DB funding. The second will be later in the year and will be on the draft code itself. 

There is more, much more I could say about all of the topics I’ve covered this morning. If nothing else I hope I’ve given you an idea of the amount of change there is in our industry and the vital importance of us working together.

Thank you.

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