Regulating work place pension funds: Latest challenges around security, sustainability and risk
Good morning everybody, it’s very good to see you here so early and thank you for coming. I’m very grateful to the Westminster Business Forum for the invitation to speak here this morning.
As you can imagine, I’m often invited to speak at events about pension schemes which are under stress, or have sponsors which are under stress, or those situations which have hit the headlines – such as BHS, British Steel, and more recently of course Carillion.
Cases like these are clearly very distressing for their members and they can affect public confidence in pensions.
So I think it’s really important at events like this one to take the opportunity to paint the bigger picture – and to remind ourselves of the value of workplace pensions as a form of saving. For the vast majority of people, a workplace pension is an excellent way to save for their retirement to help them maintain a quality of life in their later years.
A workplace pension gives them not just a place to protect and grow their money for their future, it also gives them extra money beyond their own contributions – in the form of contributions from their employer and tax relief from the government.
Automatic enrolment and master trusts
More and more people are saving into a workplace pension thanks to automatic enrolment. More than none million people have begun saving for their retirement since the start of automatic enrolment (AE) in 2012.
And we are about to hit the one million mark for employers – that’s one million employers of all sizes who have enrolled their staff into a workplace pension.
This surge in the number of people saving has had a massive impact on the pensions market. The vast majority of people are being enrolled into defined contribution (DC) schemes. DC schemes are now the dominant form of pension provision in this country.
This means much of the risk and responsibility is shifting away from the employer and towards the individual. So it’s vital that we – the policy makers and regulators – provide a robust framework and a set of clear governance standards that protect members’ savings as far as possible.
That is one reason we were delighted to see the Pension Schemes Act 2017, which we believe will create a safer and more sustainable DC market. It will bring in a much tougher regulatory framework for master trusts – the large multi-employer, trust-based schemes, which most employers are using to enroll their workers.
Since 2010 there has been an unstoppable rise in master trusts with a 2,000% increase in membership, largely driven by AE, and they now have nearly seven million members between them. But until recently there were low barriers to entry, no capital requirements, no rules around winding up if the scheme got into trouble and no fitness and propriety test for those controlling and directing master trusts.
It meant that members of these schemes in our view faced a set of risks beyond those faced by people saving in a single employer’s scheme. We’d been calling for tougher regulations around master trusts for a long time at TPR, so it’s satisfying to see the new draft regulations that the Department for Work and Pensions (DWP) published in November.
We’ve been working with the DWP on these draft regulations and we’ve also been in discussion with the master trust industry for more than 12 months. We expect to publish our code of practice for consultation on how authorisation process will work, and how the criteria need to be met, at the end of March.
If master trusts don’t meet these criteria they will need to exit the market. If they do meet the criteria and become authorised, they will then have to show us on an ongoing basis that they maintain the necessary standards.
It’s highly likely that the introduction of these regulations will drive consolidation of some master trusts, and we will see others who are unwilling to go through the authorisation process, and who will drop out of the market voluntarily.
We think all of this will produce a more secure and sustainable market. And in each of these cases – whether a scheme withdraws from the market voluntarily or is forced to stop trading – we will work with them to ensure their exit is orderly and their members’ savings are protected.
Before I move on to the subject of defined benefit (DB) schemes, it’s worth mentioning the important increase in pension contribution rates within automatic enrolment that is coming in April this year.
There has been plenty of talk in the industry and wider political sphere that while AE has created a welcome increase in the number of people saving, the current contribution rates are too low. There is a concern that members will find when they reach retirement that their pension pot doesn’t provide them with the level of income they want.
The contributions are set to go up this April from a 2% total contribution to 5%. In April 2019 this will go up to 8% in total.
This is a key step – a really important step, in the AE rollout. The uplift in contributions is also an opportunity to get people engaged in thinking about saving for their later life.
Both we at TPR and DWP are encouraging workers to think about their pension as something that is working for them. We want people to appreciate and engage with their pension.
We think people may well become more interested in their pension if they see more money going into it each month. They may want to know more about their investment choices for example. And this of course also represents a challenge to the pensions industry…to be able to answer their questions and to live up to those expectations.
You can imagine, we’ll be watching opt out rates very closely – opt out rates have so far been low – around 9% - and we’re obviously very keen to see that to continue.
I’ll move on now to talk about defined benefit (DB) schemes, I’m sure you’d like me to say a bit about those.
Defined benefit schemes
DB schemes are no longer the dominant form of provision in terms of numbers of people saving, but they still hold the vast majority of assets, and as we can see, some schemes are causing ongoing challenges for their sponsoring employer. In other cases, the position of the employer/sponsor is causing challenges for the scheme.
Each year we publish our DB Annual Funding Statement (AFS), which will highlight the key issues facing schemes with a valuation in, for example this year, 2018. Our AFS this year is due to be published in early Spring.
We’re still analysing our data, but I can tell you that our messages will continue to focus around the importance of effective risk management, especially in the context of the current economic environment, and on pension schemes’ cashflow profiles.
If you’ve heard anyone from TPR speak in the last nine months or so you’ll have heard us talking about TPR becoming a clearer, quicker, tougher, regulator, and I’d like to exapand on what we mean by that in the context of DB schemes.
For example, if there’s something in a scheme’s recovery plan or valuation that we don’t like, then we will be as clear as possible about what that is. We won’t wait for prolonged discussion between sponsors and trustees to agree a valuation or recovery plan – we’ll want to take a quicker view on whether there is likely to be agreement and whether we need to intervene ourselves.
And where we believe it’s necessary we won’t hesitate to use our enforcement powers and we will progress such cases as quickly as possible.
But I do think as a regulator it’s important for me to emphasise that in spite of the challenging conditions, we believe the majority of DB schemes should be able to pay out their obligations when they fall due. And as a regulator we stand ready, when there is an issue, to continue to work with the trustees and the employers to find a way through.
And it’s important to emphasise that the framework we have now for DB scheme regulation is considerably more robust and member-focused than it was say 12 or 13 years ago. And the biggest thing I can point to here of course is the existence of the Pension Protection Fund. 12 or 13 years ago the PPF was not around.
If a sponsoring employer failed, and there was a deficit in the scheme, then there was no recourse for the members. But in the PPF, members have a good chance of receiving most, albeit in some cases not all, of the benefits promised to them.
And it’s also worth emphasizing of course that when TPR is regulating DB schemes we have to seek a balance between protecting members of schemes – and the PPF and those who fund it – and not undermining the sponsoring employers’ ability to grow their business by placing unreasonable burdens on them. It is in the scheme’s best interests that the employer survives and, ideally, flourishes.
I’ll now move on to trusteeship of pensions schemes, which is relevant to all schemes.
The challenge of trusteeship
You will have seen undoubtedly that we are increasing our focus on trustee standards – across all types of schemes – DB, DC, master trusts and public sector. The role of a trustee is crucial in protecting members’ benefits.
It is the first line of defence for members and a complex and demanding role, combining governance, investment management and liability management.
We appreciate the value and effort of trustees, but we make no apology for expecting a high standard from them – that goes for trustees of small schemes as well as large schemes. They are responsible after all for one of the most significant financial assets that most members will have. Members have a right to expect this to be well managed.
So we are looking for trustee to have the right knowledge and understanding and for it to be up to date; for strong chairmanship and for clear decision making processes.
And we want trustees to be asking themselves tough questions – are we complying with the basic requirements in law? Do we need to seek out independent or professional advice? Is our scheme sustainable? Is it sustainable for the employer too, or do we need to start thinking about consolidation?
They are difficult questions, but they need to be asked.
We also want employers to recognise the importance of investing in the good governance of their pension schemes.
For example, employers have a role in ensuring that good quality trustees are appointed, that there is a diverse set of skills and perspectives on the board. And of course trustees, particularly employer and member nominated trustees, should be supported in terms of the time and resources to enable them to seek good quality advice and training so they are fully equipped to do the job properly.
Costs and charges
One final point before we move on to questions, I’d like to highlight the important work that is going on between the Financial Conduct Authority (FCA), DWP and ourselves on costs & charges and transparency of fees.
I’d highlight for example in particular the recent FCA’s asset management review in which they put forward a package of proposed reforms, and the DWP’s consultation in October last year on the disclosure of costs and charges for pension schemes.
At TPR we’ve also launched a thematic review into whether trustees of small and micro schemes are carrying out a robust assessment of whether their scheme provides value for members, including in terms of the costs and charges. We’ll be publishing a report on our findings later in the year.
I’ll wrap up now and let you ask the questions. I hope I have outlined for you some of the work going on to protect members and to provide a strong regulatory framework which addresses the key risks. With so many more people saving into a workplace pension it’s more important than ever that we have a pensions industry in which people can save safely and with confidence for their future.
Chief Executive Officer