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.
Who we are
Millions of people rely on a workplace pension to support them in older life. It is our job as The Pensions Regulator to protect their money, enhance the pensions system so it delivers real value, and support innovation in savers’ interests.
We make sure that employers automatically put eligible workers into a workplace pension and then pay them the pension they are due, on time and in full. We do this by driving high levels of compliance at scale, targeted communications and automation, backed by a robust enforcement approach.
We also make sure that workplace pension schemes are well-run and well governed by high-quality trustees, including by setting standards, authorising the largest schemes and ensuring employers and schemes meet their legal obligations to savers.
The changing pensions landscape
Over the last decade, the pensions landscape has changed radically. Thanks to the success of automatic enrolment, we have built a nation of savers. Private pension participation has doubled and more than 8 in 10 workers now invest in a workplace pension. However, government figures show that 12.5 million people are under-saving for retirement. The challenge of the next decade is to make sure that the pensions system delivers real value for money and provides the retirement income that people need.
At the same time, the market itself is transforming into a competitive market of fewer, larger pension schemes through rapid consolidation. Larger schemes can offer the benefits of economies of scale, with the power to invest in a much bigger range of assets. This has potential to not only boost the outcomes of millions of savers but benefit the UK economy too.
Most savers are within defined contribution pension schemes. High compliance alone cannot assure good outcomes for savers in this world because the benefit they receive is dependent on the growth of their investments. Good outcomes are therefore dependent on enhancing the system and innovation in savers’ interests. This means there is an interdependency between the adequacy of retirement saving for the UK workforce and the sustainable growth of the UK economy.
We are transforming to make sure savers get good outcomes from pensions
Because of the radical changes in the market, we have made fundamental changes to our regulatory approach over the last 18 months. Our goal is to create a more dynamic and competitive regulatory environment.
We are scanning for a much wider range of risks wherever they arise, and targeting interventions where they offer the most value to savers, focusing on using our influence to improve outcomes over the longer term rather than tick-box regulation.
We are making greater use of data, evidence and insight to understand the complex financial ecosystem, being transparent on the outcomes we seek for savers, and fostering greater collaboration and innovation with the industry to make those outcomes a reality for all.
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. A summary is also provided in the appendix.
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.
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 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.
In anticipation of this legislation, 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. This means that from implementation of the legislation we can set our supervisory approach but 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 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.
Our commitments:
- We will design the process and system for active analysis of investment performance data when available through the Value for Money Framework. 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 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.
- 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, etc 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 investment governance.
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 should be 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 is based on 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 five to six years, our successful supervision of schemes and the fact that many master trusts have become profit-making entities for their financial sponsors, has demonstrated that master trusts are less likely to fail. This calls into question the prudence of maintaining £350 million to £400 million (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. This would also mean that the barriers to entry were lower, making the master trust market slightly more competitive, helping to ensure they were all focused on investing well for members and delivering good value for money. 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.
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 circa 1 million small and micro employers where freeing up time and resource can directly support increased productivity.
Our commitments:
- We will review our regulatory capital reserving requirements for master trusts with a view to ensuring it is proportionate, which could unlock hundreds of millions of pounds 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 and 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, designed to navigate the complexities of the information age and pursuing better outcomes for workplace savers. It is a five-year plan to reduce unnecessary regulatory burden, enable effective market competition and benefit savers through industry innovation. 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 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 enable 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
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 committing to 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 three areas which could generate growth:
- your commitment to support us to remove unnecessary legislation once we have completed our review
- consideration of delegated rule-making powers
- convening a wider cross-government investment and growth group as part of its industrial strategy
There are 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 burden. 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.
Creating a delegated rule-making power would enable TPR to most effectively make sure that its interventions delivered value to the saver and 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 and low-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.
Thank you again for this commission and I look forward to working with you to support growth in the interests of pension savers.
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
- We will design the process and system for active analysis of investment performance data when available through the Value for Money Framework. 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 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.
- 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
- 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
- We will review our regulatory capital reserving requirements for master trusts with a view to ensuring it is proportionate, which could unlock hundreds of millions of pounds for investment.
- 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 and the economy, and to propose removal of unnecessary legislation.
4. Driving growth through digital and data enablement
- We will review and streamline our data requirements, where possible, so that schemes are asked once for information, in a clear format in the right way.
- We will provide government with our view on where wider data legislation could be harmonised and streamlined to benefit growth for pensions.
- We will set up an industry data and digital working group to develop the maturity of the pensions industry in digital, data and technology unlocking its transformative potential.
5. Supporting market innovation
- 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.
Our asks of government
- Your commitment to support us to remove unnecessary legislation once we have completed our review.
- Consideration of delegated rule-making powers.
- Convening a wider cross-government investment growth group as part of its industrial strategy.