Nausicaa Delfas, Chief Executive of The Pensions Regulator (TPR) gave a keynote speech at Professional Pensions Live entitled: “An update from The Pensions Regulator”.
Our priorities:
- driving value for money in defined contribution (DC) schemes – we will scrutinise smaller schemes with the Value for Money regulatory initiative; we are changing the way we regulate Master Trusts; we will incentivise demand side through employers
- securing the future for defined benefit (DB) schemes – the DB Code provides clarity of our risk tolerances, and later this year we will provide guidance to help schemes to consider alternative models
- raising standards across all scheme types – specifically trustees need to focus on data quality and administration in the run up to pensions dashboards deadlines
Good morning.
A year ago, almost to the day, I made my first speech as the Chief Executive of The Pensions Regulator (TPR) here at Professional Pensions Live.
I set out the pensions challenge we all face.
- That the shift to defined contribution pensions has created a new pensions market, with many more saving, but their benefit uncertain.
- That defined benefit schemes continue to mature, with new consolidation models emerging to meet a new funding reality.
- That the role of trusteeship is changing, becoming more complex as schemes evolve into fewer, larger entities.
- And that in this new pensions world – we must all help savers make the right decisions at retirement. To help them turn their pots into something that sees them through their older age.
Speaking one year on, where are we today?
The pensions challenge remains
The defined contribution market has continued to grow and consolidate. It now stands at over 28 million memberships with £158 billion assets under management.
At the same time, there has been an 11% reduction in schemes year on year. The vast majority of savers, some 90% of memberships are in master trusts, where rapid growth is expected to be concentrated in just a handful of schemes.
In defined benefit pensions, schemes continue to close – just 4% of private sector pensions schemes are open to both new members and future accrual. And funding levels across the market are at the best in living memory – with more than 80% of schemes fully funded.
New models continue to be developed to support schemes in securing their benefits and we have seen the first transactions into a superfund.
The expectations of trusteeship have changed – with a much stronger focus on stewardship of investments brought about, in part, by the government’s Mansion House Reforms.
The nature of trusteeship is changing, with professional and sole trusteeship models increasingly dominating. Market data suggests that the ten largest firms are accountable for the management of over 2,300 pension schemes with a combined asset value exceeding £1.1 trillion.
And we are starting to see providers innovate with solutions at retirement. New product offerings are starting to emerge which have the potential to help savers navigate incredibly complex choices about how to support themselves in retirement.
But we have a long way to go. We know that 34% of DC pension holders aged 45 and over say that they do not understand their decumulation options. I wonder how many more are picking options not suitable for their personal circumstance?
So, does the pensions challenge remain? Absolutely.
The millions of people now saving for retirement deserve the market to work for them.
They need the system they save into to be the best it can be for savers.
And to make this the case, all of us – government, regulators and industry – must create a clear roadmap of priorities which means that we can grasp the opportunities presented by our evolving market and mitigate the potential harms.
Our corporate plan delivers for savers
Our latest three-year corporate plan is the first step in setting out that roadmap.
Recognising that the market is in a state of change rapidly shifting towards fewer, larger, pension schemes, it sets out how we will protect, enhance and innovate in savers’ interests.
The roadmap is simple, that:
- all defined contribution savers receive value for money
- all defined benefit schemes secure their future – whether that’s in their end game or an ongoing offer
- all schemes are well run with high quality data powering informed decision-making by excellent trustee boards
- and to ensure this comes to pass, as a regulator you will notice that we will deliver differently to make it happen
I want to take each stop in the roadmap in turn.
Driving value for money
Our overriding priority for defined contribution schemes is to make sure that all savers receive value for money, from joining a pension scheme to being supported into quality products at and through retirement.
Yes, you’ve heard me talk about our forthcoming value for money framework and how disclosure can put the wheels in motion for effective competition.
But we cannot wait for legislation to make sure savers’ needs are met.
This starts here and now.
First, by ever greater scrutiny of small schemes.
Small schemes can provide good value. But when our data shows that less than 20% are assessing if they deliver good value for money – I suspect that many do not.
That is why you will see a step-change in our enforcement approach. Going out into the market, at scale, to check that trustees are complying with their duties.
Regulatory compliance is not optional. And we have already issued our first fines for breaches of the requirement for smaller schemes to undertake detailed assessment of value for members.
We have seen that just by approaching schemes, reminding them of their duties, and setting clear expectations, that some choose to act in their members’ best interests and wind-up.
This year, we will expand our regulatory initiative to make sure we target many more of the schemes with assets of less than £100 million who are required to comply.
Second, we will drive value by evolving our approach to master trust supervision.
The authorisation and supervisory regime of master trusts has been a success under the terms that it was set up.
We have not seen unwieldy exits from the market that have harmed savers. Instead, we have seen commercial operators start to refine business plans with consolidation driven by opportunity, not by necessity through difficult circumstances.
And on the whole, master trusts have high levels of governance and administration relative to the rest of the DC market.
Master trusts are evolving into large-scale, complex, financial institutions. In less than six years, over three-quarters of trust-based DC members could be in schemes of over £50 billion.
Those schemes could not only have a large say on the retirement outcomes of millions of savers – but could also move markets.
In this environment – our approach and our focus has to change.
The product and outcome of good governance and administration must be value for the saver. And this must be the lens by which we scrutinise schemes.
This means a much greater focus on investments, and it means a different kind of engagement.
It must be expert to expert, using data and disclosure as the prompt for a nuanced discussion around what schemes are aiming for, checking their understanding of risks and opportunities, and playing a role in showing them the market picture and what 'good' looks like.
It means lifting the bonnet of how schemes operate to really understand their systems and controls. Not just asking that you send us the documentation, but seeing face to face what you are doing to make sure savers get the best outcome from your services.
A look ahead rather than just a focus on the past.
This new approach is not only more effective but it allows us as a regulator to build a picture of the market and identify systemic risks and market trends as well as specific risks relating to individual schemes.
You will see more of us – but I hope you will also see the clear benefit of the interaction.
And third, we will drive value by considering how to incentivise the demand side for value – engaging employers.
The value for money framework will bring clear comparable data into the market which shifts the focus from a consideration of cost alone to genuine value.
But ahead of this new era of transparency on value, we need employers, large employers, to start asking the right questions of those tendering to provide their pension provision.
We want them to ask about investments – what default strategies schemes have in place and what that might mean for their employees’ outcomes.
To challenge those schemes and providers to talk in terms that they understand about the risk and rewards of different strategies and how they contribute towards value for money.
Taken together these three elements will mean that when the value for money framework is operational – we are in the best position to capitalise on the opportunities it presents.
Securing the future for defined benefit schemes
For defined benefit schemes, our focus is on helping them secure their future. Whether that future is considering an end game for maturing schemes or a well-managed steady state for an open scheme.
For the whole of TPR’s existence, defined benefit schemes have faced a challenging funding environment. A decade or more of low interest rates creating ever larger funding gaps and difficult decisions for trustees and corporates to make.
Now the decisions are still difficult, but entirely different.
Scheme surpluses – a niche discussion over many years – is now a hot topic amongst schemes, corporates and members.
Many schemes have found that the aspirational goal of achieving fully funded status is now upon them.
Buy-out is no longer seen as the only option for securing members’ benefits and various propositions are entering the market which offer a different way.
Trustees must now be able to weigh up the different risks and opportunities for members that these models present – understanding not just risk tolerances but commercial considerations to get the best possible outcome for members.
Different trustees will approach their schemes’ futures differently, informed by their individual funding positions, gateways and strength of the employer covenant.
There is no clear-cut answer for us as a regulator to give trustees. It is for them to act in members’ interests.
But we can help them understand the kinds of considerations they should be taking into account and to set our risk tolerances for their future approach.
This is why our focus is squarely on embedding the DB Funding Code into operation, providing clarity of our expectations to the market.
And we will provide guidance to help trustees consider the full range of alternative models of defined benefit provision – making sure trustees know what end game options are available and the questions to ask when considering innovations in the market like superfunds, capital backed journey plans or other models of shared service and consolidation.
Raising standards across all scheme types
In articulating our priorities across both defined contribution and defined benefit schemes, it is clear – that trustees are operating in a complex environment. But that there is also no one measure of what 'good' trusteeship looks like.
Different kinds of schemes will need different balances of experience and expertise – as well as always faithfully representing the best interests of members.
For a DC scheme there may be many members in their 20s and a lifetime to build a pot. The only certainty they face is a future with a complex decision over their retirement many years in advance.
I would suggest the balance of skills needed for a trustee board in that circumstance are different to that of a mature DB scheme making decisions on how best to secure their members’ benefits.
Building a trustee board with the relevant skills, whether they be investment, funding, administration or data will be key to achieving a great outcome for members.
And while we will make sure that schemes always meet the basics when it comes to good decision-making practices as set out in our general code, we will also check and challenge trustee boards in a way that is tailored to the personal circumstance of their scheme.
For example, many schemes now employ professional trustees or use sole trustee models. We need to fully understand how they operate and their business models.
These firms present new risks and opportunities for us as a regulator – potentially raising standards and giving greater assurance, but also concentrating decision-making in the hands of a few and detaching decision-making from the membership.
That is why we will target our approach in a strategic way – learning from our experiences of engaging with third-party administrators to make sure savers’ interests are always met.
But across all types of trustees, we will need to understand what trustees are seeking for their members, and play a role in scrutinising the decisions that they make in members’ interests. I believe that whatever the type of trustee, and whatever the scheme they govern, a sign of quality decision-making is in asking the right questions, informed by the right data.
Data quality and disclosure presents new opportunities
Disclosure of that data – the product of strategic decision-making – and improvements in data management and quality is a huge opportunity for the whole market.
In the present day, improved data in DB schemes can lead to more attractive end game options. And in DC, improved data quality is likely to make small schemes more attractive to master trusts and give them choice in consolidation.
But in the future, the opportunities are almost limitless for creative and competitive minds who want to deliver more for savers.
Rather than asking you to submit data to us in an online portal, we will start to encourage industry to embrace transparency through open standards, open data and common protocols to exchange data and enable flow.
We want the pension industry not just to evolve – we want it to thrive, setting new benchmarks for transparency, efficiency, and societal contribution.
With this greater openness, schemes will be able to develop new propositions, spotting gaps in provision, drive competition and facilitate customer choice.
This drive to improve data quality and the openness of data has been driven by new requirements in climate reporting, the upcoming value for money framework, and of course, the ever closer start of Pensions Dashboards.
It can’t be right that with the connection dates approaching, there are still some schemes that are not measuring their data or trying hard to improve it.
The stakes have never been higher – shortly, savers en masse will be interacting with their personal data as never before.
Failure to meet the deadlines is not an option. That is why we will be engaging hundreds of schemes asking them to account for how they are measuring and improving their data and will be taking action where trustees are failing to meet our expectations.
Our future approach to regulation
Our priorities show the regulatory roadmap over the next three years.
But to make this a reality, TPR must also change the way it regulates.
You should see us not only as the enforcer of breaches to regulations, but also as a critical friend that helps you deliver in savers’ interests.
That is why earlier this year I set up three new regulatory functions at TPR to help us change the way we operate: to protect, enhance and innovate in savers’ interests.
We have brought together our bulk compliance and complex enforcement teams for schemes and employers under one roof in Regulatory Compliance. This will allow us to protect savers' money by making schemes and employers always comply with their duties.
We have brought our supervisory and communications functions together – to provide effective market oversight which enhances the pensions system. This broadens our engagement with schemes and others in the market who influence delivery of pension savers’ outcomes - and facilitates a forward, multi-touch point approach that goes much further and deeper than just compliance with the basics.
And through our Strategy, Policy and Analysis directorate, we will develop a regulatory environment that encourages and supports innovation in savers’ interests – being flexible with our regulatory approach, and co-designing regulation with industry, with savers at the heart, so that new products and services are centred on delivering the very best for savers.
I see a role for us to play not only in tackling harm but as a convenor, and supporter of future market development.
Our approach to the market will not be static because we will be flexible and responsive to risks as they emerge.
Conclusion
A year ago, I set out the pensions challenge.
That in pensions, we are in a moment of significant change that requires us all to change with it.
Today I have set out the regulatory roadmap for pensions which drives value for DC savers, security for DB members and higher standards of trusteeship for all.
All of us in this room know how it important this is, and I know that you will work with us to deliver for pensions savers.
Thank you.
