A new approach to ensure regulators and regulations support growth: response from The Pensions Regulator

Dear Prime Minister, Chancellor, and Secretary of State,

A new approach to ensure regulators and regulations support growth: response from The Pensions Regulator

Thank you for your commission.

We welcome the opportunity to engage and support growth in the interests of workplace pension savers.

UK pension savers benefit from a strong economy and we want all savers to benefit from properly diversified investments. We believe sound investment in diverse assets can not only improve outcomes for savers but could also generate growth for the UK economy. The two do not have to be in conflict.

For this to happen, as an industry and a country we must come to a collective understanding of where the barriers and opportunities are for growth in pension savers’ interests and come to some consensus on a way forward. The goal must not be to eliminate all risk in the pensions system but instead to create a proportionate regulatory environment which also takes into account the wider holistic economic environment. In determining what makes a good outcome from pensions saving we therefore must take into account the wider economic environment. 

Our commitments

You have asked for five measurable commitments or changes that we could implement in the next year within a tolerable level of risk. We list our commitments below under five headings and we look forward to exploring further with you. We expect to be able to deliver these commitments within our current funding envelope facilitated by our ongoing transformation. For ease of reference, a summary of the commitments, with outcome indicators, is also provided in the appendix as well as some information about our role and remit, and transformation.

These commitments aim to significantly boost business confidence, improve the investment climate, and foster sustainable economic growth consistent with our remit. We have also set out unnecessary obstacles preventing us from undertaking reforms, and how these might be addressed through legislation or other means.

1. Increasing the value of pension funds

We mainly regulate two kinds of pension schemes: defined contribution pension schemes and defined benefit pension schemes. Defined contribution schemes seek to deliver the best returns for pension savers. Defined benefit schemes seek to pay their promised benefit. There are 15 times as many accumulating savers in defined contribution schemes, but the majority of assets (some £1.2 trillion) remain in defined benefit schemes. Given the volume of savers within defined contribution savers there is huge potential for productive growth, with many contributing for 30, 40 or even 50 years into the future.

We believe that all defined contribution pension savers deserve value for money. That is why we are working with the government on the outcome of its consultation on unlocking the UK pensions market for growth and working in partnership with the FCA and government on work to develop a Value for Money Framework.

We will also continue to use our platform and position as a regulator to support the consolidation of current poorly performing schemes into a market of fewer, larger and better run schemes focused on value through our messaging and communications, as well as through the use of our regulatory powers as we expand our interaction with the smaller schemes. As part of this we will also consider any barriers to effective consolidation of master trusts.

As the Value for Money Framework becomes operational it will bring consistent, comparable investment data into the market, shine a light on performance through transparency, and set the wheels in motion for effective competition accelerating the consolidation of the market. We will also work with you to make sure this framework can be applied to collective defined contribution schemes and help foster a dynamic emerging market.

In anticipation of this legislation through the Pensions Schemes Bill, this year we will design the process and system for active analysis of this data. As part of this we will conduct a review of open standards for data and explore how artificial intelligence and innovative technologies can enhance the processes for value for money. We will also work with master trusts to encourage voluntary sharing of investment and asset allocation data to test and learn our approach and give indicative indicators of the relationship between asset allocation and performance. This means that from implementation of the legislation we can set our supervisory approach and also publish principles around performance helping to drive growth in UK pension funds and savers pots.

For defined benefit schemes, many schemes are now better funded than ever with around 80% fully funded on a technical provisions basis. Many are considering their end-game options and we have supported a new model of provision – superfunds – ahead of legislation, to support the productive and secure use of pension schemes assets.

Open defined benefit schemes, and those that choose to run on rather than seek buy-out in the short term are more likely to invest productively. Enabling savers and employers to be rewarded for this risk-taking in the form of distribution of surplus before wind-up or buy-out would support or potentially incentivise this activity, and we have already added a section in our new Defined Benefit Funding Code to help schemes consider surplus extraction. We also intend to publish guidance to help schemes understand a wider number of alternative models for provision, many of which are more likely to invest productively, in the coming year.

TPR is committed to continuing to provide constructive input and pensions systems insight as this complex area is explored further by DWP and HMT, but any decision here would be for government. 

Our commitments:

• We will design the process and system for active analysis of investment performance data when available through the Value for Money framework and encourage voluntary sharing of asset allocation data by Master Trusts. This means that when the legislation is enacted we can use this analysis to set public principles which make clear our market expectations and supervisory approach towards driving growth in UK pension funds and savers pots.
• We will continue to use our platform and position as a regulator to support the consolidation of poorly performing schemes into a market of fewer, larger and better run schemes focussed on value through our messaging and communications, as well as through the use of our regulatory powers as we expand our interaction with the smaller schemes.
• We will conduct a review and provide a report to government which provides sector insights, data and analysis to help DWP and HMT make a policy decision on the use of defined benefit surplus.

2. Enabling productive investment

For pension schemes to invest in a broad range of opportunities they need access to attractive investment opportunities and the capability to assess and capitalise on those opportunities.

On access, the government intends to develop infrastructure to boost UK growth and meet the challenges of climate change. Its green paper, Industrial Strategy 2035, identifies that an additional £50 to £60 billion of capital investment will be required each year through the late 2020s and 2030s to achieve the UK’s net zero ambition. The UK pensions sector is a potential source of funding for this.

Not all kinds of investments will be attractive to all schemes, based on their diverse goals and constitution. TPR can use its unique position in the sector to engage with schemes and the commercial sector to understand, and then to articulate within government, the profile of assets that would align best with the investment objectives of the various types of pension funds. This would help in identifying the ‘latent demand’ from the pensions sector in terms of the type, duration, equity/debt profile, investment size, and so on that schemes would find most attractive, for example for UK infrastructure investment. As part of this engagement, we would also seek to understand any perceived tensions between trustees’ fiduciary duty and longer-term investment in the transition to a climate resilient, nature positive and net zero economy. If desired, we can also use our convening power to bring together the pensions sector with parts of government that are seeking to finance investment opportunities, to engage them in this conversation.

On capability, last year we published our Single Code – setting the standards of trusteeship – and new guidance showing schemes how to invest in private markets. But as pensions have shifted towards complex financial institutions, the role of trusteeship has changed. There are now higher expectations around environmental, social and governance (ESG) requirements and what it means to really act in a way consistent with fiduciary duty. We believe that means all schemes must be able to consider ESG-aligned investments which have the potential to deliver good outcomes for savers as part of the UK transition. That means implementing high standards of investment governance and understanding investment risk in the round, including those that arise from climate change, nature loss and social factors.

At the same time, the pensions landscape has radically shifted with new actors influencing the decision-making of thousands of schemes and billions of pounds of assets under management. Decision-making is now concentrated in only a few hands with just 10 professional trustee firms now governing over £1 trillion of assets. At the same time, public sector and local government schemes in particular are likely to be subject to significant government reforms which means that they must have the highest standards of governance, and we would welcome continued close working on any reforms.

To make sure that all schemes have the capability to access investment opportunities which generate growth we will develop a strategy this year to raise standards of trusteeship so that all trustees are capable of considering a diversified range of investments.

We will back this by engaging with the market to understand the investment decisions schemes are making and extend our supervisory grip over wider actors in the pensions ecosystem who have an influence on outcomes including professional trustee firms. As part of this we will also generate a diagnostic of risk areas and step up our compliance activity to get low quality trustees out of the market.

Our commitments:

• We will use our sector insights to help government understand the kinds of growth opportunities that UK pension schemes will find attractive to invest in, producing a report and sharing data and insight as appropriate.
• We will develop a strategy and workplan to make sure all schemes have trustees capable of considering a diversified range of investments.

3. Reducing unnecessary regulatory burden and releasing funds for investment

As the pensions system has radically reformed, new expectations and requirements have been implemented to provide security to the system.

We believe that the goal in regulation must not be to eliminate all risk in the pensions system but to ensure that we have a proportionate system that delivers good outcomes for savers. That means we must foster a dynamic and competitive environment and consider our risk appetite in pensions relative to the holistic economic environment. That is because one is intrinsically linked to the other in terms of pensions adequacy and good saver outcomes.

As a regulator we believe reducing unnecessary burden is a fundamental part of our role. That is why over the last 12 months we have improved our data collection from employers and reduced levels of enforcement action across a number of minor compliance issues.

Some burden in the system has been created by regulations which were devised in a different context, and could now be reviewed. We believe one such area is around the regulatory capital reserving for master trusts.

The current regime was designed to ensure the orderly wind up of schemes that have failed or are in danger of failing. This rationale was pertinent to the initial authorisation of master trusts, granted in 2019 in most cases. In the intervening 5-6 years, our successful supervision of schemes and the fact that many master trusts have become profit-making entities for their financial sponsors, have made master trusts less likely to fail. This calls into question the need to maintain £350-£400m (excluding NEST) in capital reserves for a failure event, whilst also considering that the revenues of these master trusts are sufficient to meet ongoing running costs.

It is within TPR's gift to allow schemes to place greater reliance on revenue offsetting, thereby releasing unproductive capital. Any capital freed up in this way could be reinvested by schemes into services for members, product and investment innovations, technology, and ultimately jobs. In considering this reform, TPR would have to be comfortable that any proposed changes to the regime would not create unintended consequences, for example, unfair treatment between schemes or cohorts of schemes.

But more broadly, we want to make sure every regulatory intervention and requirement that schemes and employers are subject to genuinely offer value. That is why we also commit to a review of all regulatory interventions, including the existing legislation and regulations, over the next 12 months to identify any that do not drive material benefits for removal or improvement, publishing a report to this effect. In particular we will focus effort on identifying and reducing low value interventions and penalties with the ca. one million small and micro employers, where freeing up time and resource can directly support increased productivity.

Any decisions requiring changes in legislation in both of these areas will need government action.

Our commitments:

• We will review our regulatory capital reserving requirements for Master Trusts to ensure they are proportionate, which could unlock hundreds of millions for investment.
• We will review all our regulatory interventions, including legislation, through the prism of value to make sure we are targeting interventions in a way that deliver the greatest benefit to savers, which could in turn benefit the economy, and to propose removal of unnecessary legislation.

4. Driving growth through data and digital enablement

The digital, data and technology revolution taking place has the potential to transform almost every industry. For pensions and pensions regulation we believe there are huge opportunities to not only reduce regulatory burden, but also to transform the way industry operates to enable effective market competition and benefit savers through industry innovation - all of which have the potential to generate growth.

In October 2024 we launched our blueprint for the future of digital, data and technology – taking an adaptive and mission-based approach, across a five-year plan, designed to navigate the complexities of the information age and pursuing better outcomes for workplace savers. In year one we will:

• Reduce unnecessary regulatory burden – we want to become more effective, easier to work with, with better insights to drive decision-making. To make that a reality this year we will further streamline our data collection processes and identify areas of duplication in our scheme return and master trust supervisory return. We will also work with other government agencies to identify areas of data join up where we can capture data once and use many times.
• Enable effective market competition – consulting with industry on our forthcoming data strategy has highlighted opportunities for data flow to provide the information and innovation needed to enhance the market. Initial analysis has shown that Open Pensions could add significant value to the economy and we will explore its potential risks and opportunities in the year ahead. We will also build on our early AI work which has shown the value enhanced insight can bring, for example in understanding impact of market volatility and opportunities for growth.
• Benefit savers through industry innovation – we will support innovation and create the conditions for innovation by helping government set the right wider legislative and regulatory landscape. That means that this year we will provide government with our view on where wider data legislation could be harmonised and streamlined to benefit growth for pensions. This could enable new business models and opportunities for the economy as well as link into the government's National Data Library and wider Smart Data Council. We will also help industry to develop the data and digital skills needed to drive growth in the future. In the government’s Industrial Strategy data skills are expected to significantly boost the UK economy by enhancing productivity, fostering innovation, and creating high-quality jobs. Today the industry is relatively immature in this area, with only pockets of excellence. That is why this year we commit to setting up an industry working group to look at raising standards – working with Skills England as appropriate – for example by identifying skill gaps and producing a skills development strategy, and other areas to be agreed with industry.

Our commitments:

• We will reduce burden through reviewing and streamlining our data requirements, so that market participants are asked once for information, in a clear format and in the right way.
• We will enable market competition by working with government to harmonise wider data legislation and enable new working practices to drive growth for pensions.
• We will enhance market innovation by setting up an industry data and digital working group seeking a sea change in the maturity of the pensions industry in digital, data and technology unlocking its transformative potential.

5. Supporting market innovation

Whilst our statutory objectives are primarily centred on protecting savers' money, we firmly believe that to deliver good outcomes we must also enhance the system and innovate in savers' interests. Market innovation is a driver of growth, and businesses need the space to experiment, learn, and iterate product ideas based on certainty of the regulatory environment. That is why we are building an innovation hub that will enable continual communication and collaboration between regulatory teams and industry innovators.

We will assess ideas and provide steers on emerging innovation products and concepts. This will provide regulatory guardrails and enable safe experimentation around new business models and pension technologies, improving market competition and value. This year the innovation hub will build processes and start engagement across:

• Regulatory response: addressing and assessing market ideas/products for compliance and regulation.
• Stimulation initiatives (labs): facilitating experimentation and innovation through safe spaces and sandboxes for testing new ideas.
• Implementation support: guiding the integration of innovative practices into existing pensions processes.
• Market adaptation: embedding new thinking and learning from innovation into TPR regulatory practice through continuous development, training and standards.

We will facilitate co-design of a framework for responsible innovation in pensions. This group will be formed of pension industry experts and technology experts as well as experts from different sectors to cross-pollinate and speed up innovation that has impact potential.

Our commitments:

• We will build an innovation hub to support industry in bringing new products to market with potential for growth.
• We will test emerging ideas with industry, where these have potential to benefit savers and the economy.

What we need from government

To help these commitments come to pass we would ask that government also works with us to consider joint work in five areas which could generate growth.

Government has set out its intention to legislate to create a defined contribution pension system of fewer, larger, ‘mega’ schemes. The current regulatory framework was not designed to facilitate orderly consolidation of the market. We would welcome close joint working to ensure that we have the powers and mechanisms to be able to enact any legislative requirements and support the market as it makes this radical transformation.

We and industry also understand and welcome government's desire to make UK investments attractive to pension schemes. However, since the publication of a definition in the work of the Productive Finance Working Group, there have been different interpretations of the kind of assets that government is seeking investment in. To help facilitate dialogue and understanding between government and industry we would welcome government providing a new definition.

There are also several instances where legislative duties, particularly those prescribing provision of information or requiring TPR to issue a penalty, have become outdated and now constrain our ability to reduce regulatory burden on schemes. For example, the requirement for TPR to issue a fine whenever a pensions scheme fails to publish its 'chair's statement' on time is no longer required to drive desired behaviours. Currently only government, and parliament, can remove these legislative duties.

Creating a delegated, proportionate, rule-making power would enable TPR to most effectively make sure that its interventions deliver value to the saver, growth to the economy and allow us to reduce unnecessary burden. At the same time, it would allow us to iteratively adapt to the technological advancements taking place in industry so that savers and the economy are protected and value maximised.

We would ask government to commit to exploring this in its widest sense, whilst working with us to amend legislation now to allow us greater flexibility to adapt our approaches and remain effective but with a lower regulatory burden in future.

We believe that ministers should also consider establishing a government-led working group on investment and growth bringing together government, regulators and industry stakeholders to look at the issues and levers for investment and growth in the round. TPR would welcome the opportunity to be part of that conversation from a pension perspective bringing the benefit of our evidence and insight as the industry regulator to the table.

So, in summary, we request the following support from government to enable us to meet our commitments:

• Sponsor a comprehensive review of the current legal framework to ensure that we have the powers and mechanisms across the regulatory landscape, including to be able to enact rapid consolidation of the defined contribution market.
• This review should be followed by legislative proposals to ensure the statutory framework is efficient in delivering good outcomes for UK savers and the economy and removes unnecessary statutory obligations.
• A definition of what government means by productive UK investments.
• Consideration of delegated rule-making powers.
• Convening a wider cross-government investment and growth group as part of its industrial strategy.

Yours sincerely,

Nausicaa Delfas,

Chief Executive of The Pensions Regulator

Appendix: Summary of TPR commitments and asks of government

1. Increasing the value of pension funds

1. We will design the process and system for active analysis of investment performance data when available through the Value for Money framework and encourage voluntary sharing of asset allocation data by Master Trusts. This means that when the legislation is enacted we can use this analysis to set public principles which make clear our market expectations and supervisory approach towards driving growth in UK pension funds and savers' pots.
   1. Outputs: data standards for Value for Money metrics. Voluntary disclosures of investment data and asset allocation. Analysis tools stood up.
   2. Indicative outcome indicator: greater understanding of the interaction between asset allocation and performance.
2. We will continue to use our platform and position as a regulator to support the consolidation of poorly performing schemes into a market of fewer, larger and better run schemes focused on value through our messaging and communications, as well as through the use of our regulatory powers as we expand our interaction with the smaller schemes.
   1. Output: regulatory initiative targeting schemes with assets under management of less than £100 million.
   2. Indicative outcome indicators: greater consolidation of the defined contribution market. Proportion of TPR schemes engaged with that choose to consolidate.
3. We will conduct a review and provide a report to government which provides sector insights, data and analysis to help DWP and HMT make a policy decision on the use of defined benefit surplus.
   1. Output: new analysis to inform government thinking and approach to safe surplus extraction.
   2. Indicative outcome indicators: proportion of schemes choosing to run-on. Capital safely extracted for the benefit of savers and the economy. Overall DB funding levels.

2. Enabling productive investment

1. We will use our sector insights to help government understand the kinds of growth opportunities that UK pension schemes will find attractive to invest in, producing a report and sharing data and insight as appropriate.
   1. Output: a report, with enhanced data and insights, on the investment profile of UK infrastructure that may be attractive to UK pension schemes.
   2. Indicative outcome indicators: sizing of the potential demand for UK infrastructure investment. Greater proportion of UK infrastructure projects funded by UK pension schemes.
2. We will develop a strategy and workplan to make sure all schemes have trustees capable of considering a diversified range of investments.
   1. Output: a strategy and workplan alongside the initiation of a regulatory initiative.
   2. Indicative outcome indicator: proportion of memberships covered by schemes with highly qualified trustees.

3. Reducing unnecessary regulatory burden and releasing funds for investment

1. We will review our regulatory capital reserving requirements for master trusts to ensure they are proportionate, which could unlock hundreds of millions of pounds for investment.
   1. Output: report and proposal around master trust reserving.
   2. Indicative outcome indicators: release of productive capital for investment in master trusts. Profitability of master trust market.
2. We will review all our regulatory interventions and legislation to assess their value to make sure we are targeting interventions in a way that deliver the greatest benefit to savers, which could in turn benefit the economy, and to propose removal of unnecessary legislation.
   1. Outputs: quantification of the overall burden of workplace pension regulation and its value. Report outlining regulation that could be removed from statute.
   2. Indicative outcome indicators: significant reduction in the cost of regulation to the market. Greater net investment returns in defined contribution schemes. Better aggregate funding levels in schemes.

4. Driving growth through digital and data enablement

1. We will reduce burden through reviewing and streamlining our data requirements, so that market participants are asked once for information, in a clear format in the right way.
   1. Output: discoveries around our scheme return and master trust supervisory return.
   2. Indicative outcome indicator: reduction in effort or work in compliance activities schemes and employers with activities focused on value add.
2. We will enable market competition by working with government to harmonise wider data legislation and enable new working practices to drive growth for pensions.
   1. Output: a report outlining potential areas of legislation suitable for rationalisation with benefits to pension schemes.
   2. Indicative outcome indicators: reduction in effort or work in compliance activities schemes and employers with activities focused on value add. Growth in new propositions.
3. We will enhance market innovation by setting up an industry data and digital working group seeking a sea change in the maturity of the pensions industry in digital, data and technology unlocking its transformative potential.
   1. Outputs: a working group and workplan.
   2. Indicative outcome indicators: higher data security and quality of administration/service delivery. Proportion of members benefitting from schemes with qualified data and digital development.

5. Supporting market innovation

1. We will build an innovation hub to support industry in bringing new products to market with potential for growth.
   1. Output: a fully operational innovation hub.
   2. Indicative outcome indicators: growth of new quality market propositions. Reduction in costs to bring new pensions products to market.
2. We will test emerging ideas with industry, where these have potential to benefit savers and the economy.
   1. Output: working group formed.
   2. Indicative outcome indicator: greater number of commercial propositions come to market which generate growth.

Impact in indicator outcomes and timeframe

Many of the outcome indicators are not solely within our control as a regulator, and we would like to work with you on defining expected impacts and proximity indicators.

Our asks of government

1. Sponsor a comprehensive review of the current legal framework to ensure that we have the powers and mechanisms across the regulatory landscape, including to be able to enact rapid consolidation of the defined contribution market.
2. This review should be followed by legislative proposals to ensure the statutory framework is efficient in delivering good outcomes for UK savers and the economy and removes unnecessary statutory obligations.
3. A definition of what government means by productive UK investments.
4. Consideration of delegated rule-making powers.
5. Convening a wider cross-government investment growth group as part of its industrial strategy.

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