Nausicaa Delfas, Chief Executive of The Pensions Regulator (TPR) gave a speech at Professional Pensions Live entitled: 'Taking the next steps towards addressing the pensions challenge'.
Key points
- The pensions challenge remains: many people risk not having enough to support themselves in later life.
- Together, we are on a path to addressing the pensions challenge. This includes ensuring value in the pensions system and that savers can take informed decisions at retirement.
- Change of this scale is not easy to implement – to get this right we need to work together.
Good morning.
I am delighted to be here again to talk to you about the pensions landscape and our priorities as a regulator.
In preparing for today, I cast my mind back over the last couple of years, when at this event I set out what I saw as the pensions challenge: how do we build on the success of automatic enrolment to ensure that our system really delivers value for money right across the savings journey, and through retirement?
I asked this because of the very real risk that millions of people who have defined contribution (DC) pensions will not have enough to support themselves in later life. And even if they do, without support, they risk losing much of their hard-saved money by taking the wrong decumulation option for them.
The UK pension system is unfinished business.
So today, I want to talk about our path to making pensions work for everyone, together.
New legislation is set to reshape the market
First of all, we know from the King’s Speech last year that the forthcoming Pension Schemes Bill promises to have an enormous impact on our market.
Our job is to work with the market to ensure that the policy intent is delivered, and that industry is able to respond and capitalise on the opportunities it presents.
For defined benefit (DB) pensions, the government has signalled its intention to place DB superfunds on a statutory footing to provide greater security for members in closed legacy schemes. We are already ahead of the game thanks to the regime set up by TPR for assessing superfunds. We have a superfund in the market, that has been through this process – Clara. Over 20,000 members and around £1.5 billion is now in a more secure DB vehicle. We believe in the potential for many more members to benefit from this type of approach.
Reflecting the positive funding position of many schemes, the Chancellor has announced proposals to make it easier for surplus to be returned to schemes and employers. Implemented with suitable protections, this has the potential to boost economic growth through a more productive use of capital.
And to help make sure that the seventh largest pension fund in the world, the LGPS, invests its circa £360 billion worth of assets well, the intention is to provide a series of targeted reforms that will seek to improve governance, enable efficient pooling and bring better strategic connections to local areas.
For DC pensions, scale will dominate, with a minimum size requirement for all master trust default arrangements. Seeking greater sophistication in investment practices and higher standards of governance alongside the greater potential to invest in diverse assets.
Clear comparisons of value will be able to be made between schemes, with consequences for those that don’t meet the bar.
People will be able to keep track of their pension pots through the default consolidation of small pots.
And with ‘guided retirement’ all pension savers will be helped with the difficult retirement decisions they face.
These reforms have the potential to make the system work better for everyone.
But change of this scale is not easy to implement. To get this right, we need to work together – ensuring a clear regulatory environment and effective practical implementation.
I see there being two central tenets to our approach to protect, enhance and innovate in savers’ interests, reflecting the work we will be doing this year:
- first, that across both DB and DC, the system should be set up to provide value
- second, that the system enables savers to take informed decisions at retirement
Taking each in turn.
Setting system up to provide value
Defined benefit
Whether you are a DB member or a DC pension saver – you deserve value.
In DB, real value means that you are in a scheme that provides members with the best opportunity to receive their promised benefit. Or even, in some cases, enhanced benefits.
Whether the long-term objective for a scheme is to remain running on, or is instead to secure an endgame option, we expect a strategy and plan to be in place to make this a reality.
For many years, the focus of TPR’s engagement with DB schemes has been on trying to help tackle deficits.
Now, due to changes in the economic landscape and careful stewardship, more than 82% of schemes are fully funded and many are considering how to secure their future, whether that is an endgame or, for open schemes, continuing pension provision. This brings different options to the table.
Buy-out has been seen as the gold standard by many in the market for a generation. But a range of consolidator models are now in play which provide enhanced security and better governance.
Surplus – a concept alien to many over the last two decades – is now a hot topic. With around £160 billion of surplus in the pensions system on a low dependency basis, and the government setting out its intention to make it easier for schemes and employers to access this surplus. It is a choice that many in the market are considering.
That is why we will soon publish new guidance on endgame options for trustees to help them ask the right questions when deciding on how best to ensure they meet their promises to savers.
Over the course of the year, we will also embed the principles of the DB funding regime through an evolved and improved approach to DB supervision. Learning from our experience with master trust and DC supervision, we will focus our activity where the greatest risk lies and let the well-managed schemes get on with the job of delivering for savers.
Defined contribution
Turning to the DC system – currently investment savings pots – value is crucial. This is where we see a key risk. With current focus on cost, trumping a genuine focus on holistic value. That is why, from a seamless automatic enrolment onboarding, right the way through retirement, we must create the conditions where all savers benefit from value for money.
To do so, over the year ahead we will increasingly challenge schemes where we suspect value to be poor, encouraging greater transparency around performance, and taking steps to simplify the system.
Our focus on value in small schemes remains a priority and has already seen us issue almost £100,000 in penalties. We will continue to go out into the market, to check that trustees are complying with their duties. This more assertive approach has already borne fruit. So far, one in five schemes have called it a day after we prompted them to look at the facts and compare themselves with the value offered by bigger players in the market.
When assessing value, I firmly believe it can’t be done in isolation, looking only inward at performance against internal benchmarks. It should be measured across the market at large. That is why I want to help usher in an era of greater transparency.
The value for money framework will empower trustees, providing the tools they need: standardised data and metrics that matter, accessible and in the marketplace at the same time.
In advance of the framework, and to take the first steps towards greater transparency, we will work with master trusts to encourage the voluntary disclosure of asset allocation data. We hope this will help schemes manage their investments well by indicating the link between asset allocation and performance over time.
The recent prolonged period of economic volatility in global markets illustrates why for many years we have been calling for pension schemes to have the capacity to consider investments in a broad range of asset classes – to diversify their investments.
Not just to provide better returns, but more stable returns.
With the government committed to setting out a pipeline of investment opportunities over the coming decade, pension schemes are in prime position to capitalise if the evidence suggests that these investments are in members’ interests.
That is why over the course of the coming year we will also work with the market to help understand the kind of investment opportunities that will be attractive to different kinds of schemes, and with those insights we will help government understand and prioritise the kinds of growth opportunities that are good for savers, and the economy too.
But, in the search for value we must also simplify the system.
Small pots fall squarely in this category.
Modelling suggests that without intervention there will be 27 million deferred pensions pots by 2035. This is a failure of design.
To remedy this, we will work with government and the PLSA to develop a way forward on the proposed ‘Small Pots Data Platform’, a project designed to identify and source the pension pots that could be consolidated.
But we will also ask schemes how they are managing the small pots issue now, to make sure that good systems and controls prevent needless complexity in the first place.
Enabling savers to take informed decisions at retirement
So having outlined a view on value, let me turn to the second of my central tenets: that the system enables savers to take informed decisions at retirement.
Value throughout the savings journey will help generate pots that are worth saving for.
But the pensions system should not only be a savings system.
It should also be a spending system. Providing support and access to retirement income. Our priorities here are to:
- Simplify the system and allow savers to find and view their pensions all in one place.
- Support the development of new products to market which have the potential to benefit savers.
- And work towards a system which guides individuals towards the right retirement choices for them.
Pensions are about to become increasingly visible to millions of workers through the advent of dashboards.
Savers need to be able to trust the information they are viewing about their often long lost and forgotten, pensions. Data quality is essential for the success of pensions dashboards and, with deadlines looming, data should already be on every trustee board’s agenda. Despite its complexity – with 2,700 schemes eligible and 48 million membership records in scope – schemes have been making good progress.
Dashboards as a whole have provided a much-needed catalyst for radical improvements in data standards and investment in administration across the industry recently. But this should not be the end of the digitalisation journey, and that is why our approach over the next year will be two-fold:
- First, making sure that trustees have the right data hygiene in place by continuing our data quality regulatory initiative, challenging hundreds of schemes which may be failing our expectations.
- And second, by working towards common data standards through the implementation of our DDaT and Data strategies.
We will help market participants to evolve practices across the whole market through newly formed industry working groups. And help convert the undecided to the potential that improved standards have for all.
I say this having seen the benefits of our own investment in digital and data capabilities. For example, TPR has used AI over the past 12 months to support its regulatory functions and decision-making, and to better protect savers, detecting pension scams, monitoring market trends, predicting pension scheme health, and managing website feedback.
And importantly, linked to this work will be our stronger oversight of pensions administrators – critical to providing saver value and pension system integrity.
CDC
Seeing your pensions all in one place will be a massive enabler of better retirement decisions.
But people’s circumstances are diverse. And new products are needed in the marketplace to help support different kinds of people. Collective defined contribution (CDC) schemes offer one such option.
At present, the legislation only allows for a single-employer model – and we were pleased to support the launch of the first ever CDC scheme into the UK market in Royal Mail.
The government has committed to widening this to including multi-employer CDC. TPR will support the market’s development through a clear adapted code and authorisation regime so that market participants know what is expected and savers are protected.
Guided retirement
Moving on to guided retirement proposals.
We want to make sure savers in DC schemes have the biggest pots possible for the contributions they can afford to make. But when three-quarters (75%) of DC pension holders aged over 45 do not have a clear plan on how to take their money, or do not even know that they have to make a choice, it is clear that savers need more support to turn their pots into a pension.
Earlier this month we sponsored Pensions Policy Institute research into how to provide value in decumulation. It showed that currently 70% fully withdraw their DC pension savings without professional advice or tailored guidance.
And of the more than 450,000 pots accessed for the first time between October 2023 and March 2024, 51% were fully withdrawn as cash. That may be right for some, but it is highly unlikely it is right for all. And without support, savers may find themselves forced to work for longer or strapped for cash when they should be enjoying older life.
Plans for guided retirement present a fantastic opportunity for industry and policymakers to provide products and services suitable for different kinds of savers.
The goal must be simple choice architecture and communications to help guide people into products that are right for them, along with a default safety-net for those unable or unwilling to make a choice.
We are keen to help and that is why this month we launched an innovation support service to get new ideas off the ground that can boost outcomes for savers.
As part of this we will provide opportunities for informal, and confidential, discussions on new product ideas, streamline our processes and reduce unnecessary regulatory barriers.
On all of these aspects, our door is open, and we’d welcome dialogue with you in our supervisory and market engagements to get your ideas and to help shape any secondary legislation that supports the forthcoming Bill.
TPR's own continuing change
I have outlined two themes that will inform how we seek to meet the pension challenge:
- for the pensions system to deliver value, and
- for savers to be able to take informed decisions at retirement
As a regulator we will continue our own change towards a more prudential-style of regulation, taking account not just of individual schemes, but of the functioning of the market as a whole. As part of this we will continue our more open and transparent dialogue with those who run pensions.
I hope that you are starting to feel the difference with our changing approach to market oversight. That we are focused squarely on outcomes – with shifts in approach in our engagement with master trusts, professional trustees and administrators.
You will have seen us bringing in broader financial market and asset management expertise, including doubling the number of investment consultants and introducing senior advisers to challenge ourselves and engage with you on an expert-to-expert basis.
I also hope that you have heard that we want a more regular and proactive dialogue with you. We want schemes, advisers and administrators to engage with us early to prevent problems arising later.
Conclusion
The market is changing. The regulator is changing. But the pensions challenge remains.
How do we build a system that gives millions of pension savers an adequate income in retirement?
There is no quick fix. And no easy solutions. But now is the time to work together to make pensions work for everyone. Thank you.
