Patrick Coyne, Interim Director of Policy and Public Affairs, delivered a speech at the Professional Pensions Defined Contribution Conference entitled 'The evolving regulatory landscape'.
Key messages
- The Pension Schemes Bill will fundamentally reshape the defined contribution market.
- If implemented well it could deliver two critical outcomes for the automatic enrolment system: putting value for money at the heart of everything and turning a savings system into a pensions system.
- There are three to five years’ worth of reforms ahead and there are a number of steps that schemes can take now to get ready.
- We’d urge schemes and trustees to look now at how they are outcome-focused, building scale, are data-led and supporting savers into retirement.
- As a regulator we commit to widely engaging as the Bill develops and we would encourage industry to proactively come forward with practical ideas to make the system work for everyone.
Introduction
They say that history doesn’t feel like history when you’re in it.
But what a time to be working in pensions.
The Pensions Regulator (TPR) was set up exactly 20 years ago and over that time we have seen a number of pensions acts iteratively reform the system.
Post Turner, we turned a page in pension saving.
Automatic enrolment, clearly, was a game changer.
Reversing a decades-long decline in participation to create a system where more than 8 in 10 workers contribute into a pension.
This is a fantastic success. But if the challenge of the last decade was getting people saving. The challenge of the next is to make sure their saving is really worth it.
I feel that there is a collective recognition that the Pension Schemes Bill will fundamentally change our market.
And I firmly believe that change is needed.
Because many people still face uncertain outcomes in older life.
The automatic enrolment defined contribution (DC) system is still in its infancy.
But its importance can’t be understated when there are now seventeen times as many active pension savers in DC schemes than in private defined benefit schemes.
And while it is brilliant that we now have a much more diverse group of savers putting something away, government research suggests that 12.5 million are under saving for an adequate retirement.
I’m sure you would recognise reasons for this.
People are living longer.
Many have caring responsibilities. Home ownership is down.
And a good chunk of Generation X missed out on pensions until much later in their working lives.
Different people may face some or all of these issues, but research suggests that they are particularly acute for those born in the 1970s, women, and low to medium earners.
The pension system alone can’t solve everything.
But collectively – as government, regulators and industry – we can do our very best to make sure that when people entrust us with their hard-earned savings – we make that money go as far as it can, and suitably support them with their retirement decision-making.
And that’s where the Bill comes in.
The Pension Schemes Bill
Throughout today you will have heard about the various different initiatives the Pension Schemes Bill brings forward.
For me, across DC, the Bill can generate two important outcomes:
First, to make value for money run through the system.
Giving you the tools to consistently compare your performance against others in the market through the value for money (VfM) framework.
Helping to stop small and often forgotten pension pots forming and eroding value through the default consolidators – which will bring together pots to boost their size, reduce admin costs and delivery better outcomes for savers.
And for master trusts, making sure they have the scale to access a broad range of diversified assets and drive efficiencies and new standards in service provision.
And second, to turn a fantastic savings system, into a genuine pensions system.
Through the Guided Retirement duty we won’t just focus on building people the biggest pot possible, but also support them to access their money and use it wisely throughout their retirement.
A successful and practical implementation of these reforms will be essential to delivering the outcomes we hope for.
Primary legislation is necessarily broad and the detail of these reforms will be set out via secondary legislation, statutory guidance and TPR codes still to come.
And we expect to work with the Financial Conduct Authority (FCA) and DWP to consult widely on the practicalities of the reforms to make sure industry is ready and that the reforms genuinely work.
Four focus areas to help schemes prepare
These reforms won’t all come into force at once, and the Government’s Pensions Reform Roadmap outlines indicative dates that you might expect new expectations of you.
We have three missions as a regulator – to protect, enhance and innovate in savers’ interests. And to deliver these missions, we will seek to bridge the gap between the introduction of new duties and the here and now need to govern schemes well and provide high quality services.
That is why our overarching focus for all schemes will be on improving governance, driving value and supporting savers at retirement.
And with this in mind, I think that there are four themes that run across the various strands of the Bill focused on the DC system.
And for each of these themes there are steps that schemes can take now to get ready.
The first theme, is a saver outcome-focus
A consistent focus on improving long-term value and retirement outcomes for savers runs across the Bill.
Pension schemes are uniquely placed to consider long-term investments. And with many newly enrolled savers potentially having more than 45 or so years of saving ahead of them – investing for the long term has to be the goal.
It is critically important that schemes are always using available data and insights to review their investment strategy. And that trustees are challenging their advisers now to make sure that they are providing suitable data and commentary to understand if the long-term objectives for members are being delivered.
This year we have revamped our supervisory approach to DC schemes and have stepped up our focus on investment governance. You will have already started to experience more focused, expert-to-expert interactions seeking to understand key decision-making in real time, improve regulatory compliance and, therefore, saver outcomes.
What we want to see from you is a clear control environment. A suitable calibration of risk and reward. And comparison of real-world performance with forecasted models to understand the likelihood of delivering on your long-term objectives for savers, with suitable adjustments when you feel you are not on track.
The value for money framework will look to provide consistent, comparable data in the marketplace over a long-time horizon to help schemes refine and revise their investment strategy. But it likely won’t be in force until 2028.
That is why later this year, TPR will work with the Financial Conduct Authority (FCA) to launch a joint market-wide voluntary survey – asking for detailed asset allocation information from major DC schemes.
Running as an annual exercise, we hope to play a version of this data back to the market to allow trustees to gain better insights on any connection between value and asset allocation and make more informed investment decisions for their kinds of savers.
The second theme, is to build the scale to deliver more
Across the reforms consolidation in savers’ interests is encouraged to achieve better governance, lower costs, and access to a broader range of investments.
Generally, we believe scale is an indicator of good outcomes for savers and are supportive of consolidation in savers’ interests.
For example, our research shows that 84% of large schemes have looked at their processes against the expectations in our general code to identify gaps and develop action plans, compared to just 20% of small schemes.
But as a regulator our goal is to make sure you deliver good value, whatever your size.
As part of a focus on member outcomes, trustees should consider whether their scheme is sustainable in the long term and if they genuinely provide value.
Many single employer trusts do – offering unique services and investment strategies aligned to members they really know and care about.
But if others in the market already offer more, or may very well do so in the near future, I’d ask you to consider what the steps would be to consolidation if needed.
Scope out a process you would follow. This may consider things like which master trusts might be right for you and your memberships, how you would assure yourself of their ethos and governance arrangements, understand their investment strategies, and start to consider what practical barriers such as legacy arrangements may be in place that would need to be overcome.
And if you are already at scale, we’ve seen the market innovate to provide different investment opportunities. And I’d urge you explore what is on offer to see if it is right for your scheme and your kind of members. These include the broad range of long-term asset funds (LTAFs) that could play a part in your default funds if appropriate as you seek diversified investment opportunities.
The third theme, is to for data-led trustees becoming increasingly transparent and accountable
Reforms like small pots consolidation and VfM assessments rely heavily on high-quality data. And across the Bill there is an emphasis on clear reporting, comparison, and accountability.
Good data means you are able to make good decisions. And I firmly believe that trustees – with their fiduciary duty – are a powerful force for good in our workplace pensions system.
Nausicaa Delfas, our CEO, set out earlier this month how we would be working with the market to raise standards of trusteeship – helping to bring pensions trusteeship into line with other professions and corporate governance standards.
But as part of this we also want to empower you to get on with the job.
Fundamental to this is having the right information, quality data, at your disposal to deliver on the promise to act in the best interests of members.
I know that many of you will be focused on improving data quality as the connection deadlines for pensions dashboards loom. 8 in 10 schemes tell us that they are confident that they will meet their deadlines. Great news.
Now I’d urge you to use dashboards as a catalyst for broader change.
I don’t just mean that you should audit member data for accuracy and completeness – although this is of course fundamental to the success of dashboards and the areas where we have, so far, challenged around 800 schemes in our ongoing regulatory initiative.
But also, I’d urge to you to consider investing in digital infrastructure to support automation and reporting, and engage with your administrators to understand just what services they can provide given suitable investment.
In our data strategy, we set out that we would be working across the whole industry to drive consistent, coherent and, where possible, open standards for data. The purpose of this is to give you the information you need, but also to help us reduce unnecessary regulatory burden.
With this improved data hygiene, we also want to ask you for information in more modern ways and make sure that we only ask for data which is relevant to good saver outcomes.
One of the reasons, we have committed to reviewing what information we ask for in our scheme and supervisory returns this year and why this month, in the DB world, we launched a new digital submission tool for the statement of strategy which through design allows us to identify, prioritise and tackle risk in the pensions market.
This new approach will mean higher expectations of you, the pensions industry. But in return unnecessary burden will be reduced.
The fourth theme, is the need to innovate and help people turn their savings into a retirement income
The government has signalled its intent to introduce a new Guided Retirement duty in the forthcoming Pension Schemes Bill. A shift from accumulation-only models to full whole of life support is a foundational reform.
That will mean that trustees are required to either offer or partner with a provider of decumulation services.
With simple choice architecture and communications to help guide people into products that are right for people like them, along with a default safety-net for those unable or unwilling to make a choice.
This is a fantastic opportunity for all of us to get our heads together and provide a suite of products and services which are suitable for different kinds of savers.
Even if, for many people, that is a product that provides a regular and stable income for life.
We know from our supervisory engagement that many of you are already thinking about designing retirement solutions. We welcome this. And if not – I’d urge you to start having these conversations at your trustee boards.
If you’ve got an emerging idea. Reach out to us.
Last month, we launched a new innovation support service – with a particular focus on new models and decumulation products.
One of the services that provides is a discussion session if you are in the early stages of developing a new pensions idea or solution.
Whilst we won’t be able to provide specific advice, approve or endorse the idea, we will be able to confidentially discuss your proposition and highlight any concerns that we may have from a regulatory perspective, if any.
But whether you come to us with new product ideas or not, we’d welcome seeing more schemes explore what is possible in supporting savers to make the right retirement decisions for them.
We hear worries about straying across the advice-guidance boundary. But in our view, too often, trust-based schemes hold back – even where the boundary allows for meaningful engagement.
DWP’s reforms will require schemes to take a more active role to help their savers navigate retirement. So, start to think what that might look like now and consider user testing different communications with your savers to make sure you’re ready.
Next steps
The Pension Schemes Bill is historic in the context of our pensions system.
And the government’s roadmap plans out changes that will take place over the next three to five years.
I hope these reforms will put value for money front and centre of all that we do and help turn a fantastic savings system, into a genuine pensions system.
But exactly how we get there is still to be worked through.
You can already take steps now to iterate and improve your provision and we’d welcome your ideas and insights as you refine your strategic approaches.
We will seek to widely engage as the Bill develops and we would encourage you to have your say.
Participate in industry forums and working groups and respond to our consultations to stay ahead of implementation requirements and make these reforms the best they can be.
Thank you.
