Good morning everyone. First of all I’d like to thank Barnett Waddingham for inviting me to speak to you all this morning, it’s great to see so many of you here. I sit on the board at The Pensions Regulator (TPR) and my role is Executive Director for Frontline Regulation, so my responsibility is for all the case work at TPR, unless it relates to automatic enrolment.
Our work in the pensions industry is touching more and more people. Every eligible young person who enters the workforce for the first time will be enrolled automatically in a pension scheme. Every entrepreneur who starts a new business venture will enrol all her eligible new staff into a pension scheme from day one.
The latest survey from the Office of National Statistics revealed that the total membership of occupational pension schemes was 39.2 million in 2016, the highest level recorded by the survey, which is an increase of 17.1% on the previous year. And the number is still growing.
This is excellent for people who are building an income for their retirement, and it’s excellent for our economy as a whole. But it brings with it greater responsibilities for all of us here, as it’s our responsibility to ensure that those savings are safe and well looked after.
It’s so important that we create trust, not just with the young members newly enrolled into a pension, but also for those taking the final steps on their savings journey, who are ready to draw down on their life savings. We want them to feel confident that all of us here – trustees, employers, advisers and regulators – are protecting their savings.
Things are changing quickly for all of us. Isobel will be speaking about the global environment shortly, which obviously has a big impact on our industry. But there are plenty of trends and emerging risks closer to home that we need to be aware of.
For example, as we move to a post-Brexit economy, trustees will need to think about how their employer covenant might be affected, particularly those with employers who rely on cross national supply chains or common standards.
Changes in demographics affect our landscape – for example we are shifting towards an aging population. It’s good news that people are living longer, but we do see a greater risk where some schemes are not managing their cashflow appropriately, as they mature and move into the de-cumulation phase.
Developments in technology are bringing opportunities as well as risks for schemes: opportunities such as the introduction of the pensions dashboard and the ability to engage more easily with members. But risks, such as cyber crime, are increasing – pension schemes are increasingly likely to become a target, and need to make sure their data and assets are secure.
These trends and emerging risks influence the areas that we at TPR focus on. We will be publishing our latest Corporate Plan shortly, where we outline these environmental factors and risks in more detail, along with our core priorities for the next 12 months, and I’ll pick out a few a few of them for you today here today.
I’ll concentrate first on defined benefit (DB) schemes, as I know that the majority of you here are particularly interested in this area
As you’ll all be aware, the government recently published its White Paper on the sustainability of DB schemes.
At TPR we welcome and support the proposed measures in the Paper. They are primarily aimed at clarifying the rules and expectations rather than making fundamental changes to the existing system. And that’s a good thing. We have been calling on government for a set of more effective regulatory tools, and these new measures do provide that. The White Paper clearly supports our drive to be a clearer, quicker, tougher regulator.
In scheme funding for example, we believe the proposed measures mean we’ll be able to be much clearer about what we expect from employers and Trustees in relation to scheme funding. And for the small number who are evading their obligations, we’ll have tougher, more proactive powers allowing us to intervene more effectively.
We’ve just published this year’s Annual Funding Statement, which highlights some of the key issues we have identified facing schemes with valuations from September 2017 to September 2018.
We are concerned about the growing disparity between dividends and deficit-reduction payments and we do expect fair treatment between shareholders and trustees. We expect trustees to negotiate robustly with the employer to secure a fair deal for the pension scheme. And even for schemes with the strongest covenants – we want to see shorter recovery plans if the sponsoring employer is paying big dividends.
And, since TPR will be much clearer about its expectations, those who wilfully fail to comply with the clearer funding standard will see us be quicker and tougher in the use of our funding powers.
You may well have heard about our TPR Future programme, which is a comprehensive and in-depth review of our regulatory approach, to make sure we are a regulator fit for purpose for the next decade. It was the work we did in TPR Future which led to us evolving into a clearer, quicker, tougher regulator.
We are now moving into the implementation stage of TPR Future, and we are using a wider range of regulatory tools: all schemes will experience some form of regulatory oversight at ever increasing levels of intensity.
In the DB world, that means that we’ve stepped up our proactive funding cases. In fact we’ve increased our proactive work by 90% this year to support trustees as they prepare valuations and recovery plans.
What does this more proactive approach mean in practice?
For our part – since we have committed to being a clearer, quicker, tougher regulator, you’ll not be surprised to hear that we’re being clearer at the start of the process as to what we are expecting.
We’re being more directive in what we want, as opposed to just saying what we don’t like. There will be a stronger focus on how trustees balance fair treatment of the scheme with other creditors and stakeholders. And given we are telling you more explicitly what we expect, if you still aren’t playing ball, you can expect us to be tougher.
We’ll be asking for feedback from trustees and sponsors on their engagement with us, so that the process can be improved over time.
In return, we’ll expect certain behaviours and outcomes from you:
We’d like to see you pay close attention to long-term goals. We’d like to see more trustees properly consider governance, project planning and risk management, and that you evidence this when required. And we’d like trustees and sponsors to work more collaboratively with each other and with us too.
As the Executive Director for Frontline Regulation, and therefore the person responsible for all non-AE casework at TPR, I’d like to highlight another set of measures in the White Paper which we believe can make a real difference: the planned improvements to our information gathering powers. Again, these will help us be more proactive during our investigations and support our drive to be a clearer, quicker and tougher regulator.
We’ll be able to progress cases more quickly because we could then question people at an early stage and encourage early dialogue and cooperation. For instance, in complex avoidance cases it would help us seek important clarifications on issues early on, rather than relying on issuing a series of section 72 notices.
The next step for us in the DB world is to work closely with government to develop the proposals in the White paper, including the criminal sanctions, to ensure they are proportionate, effective and that does work in practice. And the measures are likely to be a new Pensions Bill some time in 2019, depending on the legislative timetable. As you know it’s fairly busy with Brexit but we’re hopeful of a Bill in 2019.
Moving on to defined contribution (DC) schemes.
I won’t spend too long talking about DC schemes, but I do want to highlight a few key areas of development. Because although DB schemes are significant in that they hold more assets, it is now DC schemes that have a greater number of members.
90% of people currently saving into a private sector pension are saving into a DC scheme. And the vast majority of those members are in master trusts. In 2010 there were 270,000 members of a master trust. Today there are almost 10 million members. That’s why it’s so important that the regulation around master trusts was tightened up.
The new authorisation and supervision process is continuing apace, and we’ll be receiving applications from master trusts for authorisation from October this year. Our code of practice, which is there to support master trusts in meeting our expectations, was published for consultation last month. The consultation closes next Tuesday, so do please get involved and respond, if you haven’t already – the details are on our website.
It’s likely that over the next twelve months we will see a reduction in the number of master trusts operating in the market, either because they decide not to apply for authorisation or because they fail to meet the criteria. Indeed we already seeing that happen – and we are engaging with those schemes to ensure that the members are protected when being transferred to an alternative arrangement.
Another key development to note in the DC world is the new laws which came into force last month stating schemes must be more transparent about the costs and charges paid by their members. We welcome these laws and believe if members are equipped with this information, it will help them make an informed decision about their pension savings.
Moving on to governance and standards of trusteeship – a subject affecting all schemes.
Governance and standards of trusteeship
Trustees have a significant responsibility in protecting the benefits of their members and we make no apology for expecting high standards. We know from our research that governance standards are patchy across the landscape. Our goal with our 21st Century trusteeship project is to ensure that all governance is at least ‘good’.
One thing we are particularly keen to see from trustees is that they challenge and question the advice they get from external partners, to make sure that it’s in the best interests of the scheme and its members. There has been significant attention recently on companies providing outsourced services to government and industry, including pension schemes.
As trustees, you will often need to appoint services providers to your schemes to carry out specific tasks, such as administration, on your behalf. While outsourcing is acceptable, it is the trustees who remain ultimately accountable for running the scheme.
So the ability to effectively manage commercial relationships is a key skill for trustees.
We want trustees to be clear on what they are delegating to third parties and how they are monitoring it. Their needs and their role will change and develop over time. They should think about the targets and metrics they are using to understand performance. They should also think of less formal mechanisms, how often do administrators attend board meetings, how do they keep up to speed with changes and adapt? As in many areas of trusteeship it is important to keep this dialogue going.
And they’ll need to make sure that arrangements are in place to manage any risks that would have significant consequences for the scheme and members. This includes ensuring that those third parties have a business continuity plan (BCP) in place, which sets out what actions would be taken if significant events occur, such as IT failures or business collapses, that would affect the running of your scheme.
As I have mentioned earlier, TPR is taking a clearer, quicker, tougher, approach towards regulation. That extends to trusteeship, and we are already taking action against schemes that are not complying with the basics, such as submitting their scheme return, or, in the DC world, the chair’s statement.
We are fining schemes not just when they don’t produce a chair’s statement but also if they produce a chair’s statement that is non-compliant. We are aware this has been controversial in some quarters – we know there have been concerns about some of these fines for non compliance and we are listening to those concerns and reviewing our approach. But, that said, we will continue to expect high standards of trustees.
If schemes are struggling to meet the required standards they should seek good quality external advice, either from a professional trustee or from a pensions adviser who will be able to bring experience, independence and knowledge to the scheme.
Where schemes are unable to meet the standards we expect, we want them to consider winding up if it is appropriate, possible and practical to do so. Equally we would encourage struggling schemes to consider consolidating by transferring members into a larger scheme that is able to fulfil higher governance standards.
So there is an awful lot for trustees, sponsors and advisers to be thinking about. There is no doubt another challenging year ahead of all of us in the industry. But as you can see there are positive moves to ensure that the regulatory framework is as robust as possible.
The new measures in the White Paper, the new master trust authorisation process, the TPR Future project, which is nearing fruition – all of these things will help to strengthen the framework – and it’s up to all of us now in the industry to make it work so that members receive the benefits they are entitled to.
Executive Director of Frontline Regulation