The Pensions Regulator (TPR) CEO Charles Counsell speaking at the 2022 PLSA Annual Conference on the challenges faced by the pensions industry.
Introduction
Good afternoon, everyone and thank you Nigel for the kind invitation.
It’s great to be here and meeting people face to face again. I have personally really valued it.
‘Todays’ Challenges, Tomorrows Solutions’ is the theme of this conference. I’ve chosen to title my contribution ‘Looking Ahead: Regulating for The Saver’.
For me, it’s the saver who should be the ultimate beneficiary of our work. By ‘our’, I mean all of us. The pensions industry. Our focus must be on the outcomes they receive, while also focusing on the risks that might endanger those outcomes, and how we mitigate those risks.
The challenges we face — and the solutions we seek — must benefit the Saver. They are at the heart of everything we do as a regulator and, I hope, a strong focus of yours.
Liability-driven investments
While the theme of my speech today will be looking ahead, clearly at the moment we are focused on the here and now. It would therefore be remiss of me not to talk about the recent turbulence in the bond market, and particularly liability-driven investments, or LDI, and the impact on pensions funds.
We have been and we continue to be actively looking at the situation in the financial markets to assess the impact on DB pension scheme funding and liquidity and we continue to meet with the Bank of England and other regulators.
Following recent media coverage, we think it is important to reassure savers that DB pension schemes were not and are not at risk of collapse due to rapid movements in the price of gilts.
Yes, there have been liquidity issues in the funds and pensions schemes have had to deal with this quickly; many of you will no doubt are in the thick of dealing with this. But contrary to some media reports, this has not meant that DB schemes are on the brink of collapse. Indeed, we have seen the longer-term funding position of DB schemes improve as a result of the increase in gilt yields.
It is really important that savers get this message. It is also really important that members of DB or DC schemes are not ‘spooked’ into making decisions that they might later regret.
As with the COVID crisis, we again call on trustees of DB schemes and their advisers to continue to review the resilience and liquidity of their investments, risk management and funding arrangements. They should plan accordingly to protect the interest of scheme members.
We remain vigilant to the risks and expect trustees to do the same and plan accordingly.
To help schemes address the challenges, we have published on our website a guidance statement for trustees of defined benefit and defined contribution schemes and their advisers.
It sets out the main points we expect trustees to consider in managing investment and liquidity risks in the face of current market conditions.
I’m not going go into a great amount of detail here — I call on trustees to read the statement carefully. But I will briefly focus on what the statement advises for DB schemes. The statement makes clear that trustees should review a number key areas relative to their current position and how significantly they have been impacted by market movements:
They are:
Your operational processes — Recent events have shown how important it is that trustees are able to act quickly when needed. You should have robust procedures in place to help them respond to changing circumstances, make decisions and implement them where the need arises. Consideration should be given to whether adding one or more professional trustees would help in these circumstances.
Your liquidity position — We expect trustees to discuss their current liquidity position with their advisers, including understanding their sources of liquidity, reviewing any liquidity waterfalls and topping up or increasing collateral where appropriate.
Your liability hedging position — As part of reviewing their risk profile, trustees should consider the extent of their liability hedging position. This will already be a key consideration for schemes that have experienced liquidity difficulties but is an issue all schemes face in the current environment, particularly those that did not have a significant level of matching assets relative to liabilities.
Your funding and risk position — While some schemes have experienced challenges in delivering collateral on accelerated timescales during recent events, and liquidity will be the main focus for many trustees, it is useful for all schemes to review their current funding positions in light of market changes.
And finally, please consider how current yields impact other areas of the scheme — we know higher yields impact on transfer values and so trustees should monitor the appropriateness of the assumptions used in calculating transfer values and review the transfer value basis in light of this. Market volatility often presents opportunities for scams, and trustees should remain vigilant and follow best practice in this area.
TCFD statements
During my term as Chief Executive I have deliberately reoriented the focus of the organisation. The saver must be the focus of our work.
As we increasingly look toward DC, those individuals will require more support, greater options and a wider choice of products.
We all, here, know that pensions are a long-term game. The short term may require immediate action, but it’s the longer term that requires diligent strategies and strong planning.
This is precisely why, while we need to be alive to the impact of short-term shocks, we must retain our focus on those longer-term implications.
A good example of this is our need to be focused on climate change. This will have a huge long-term impact on pension schemes. It’s why the government and TPR is so focused on ensuring that all schemes consider the risks and opportunities of climate change.
Collectively we need to get our thinking aligned when it comes to climate change and the wider ESG agenda. We have provided strong messaging about the need for trustees to build it into everyday consideration. I’m yet to feel completely confident that relevant action is being taken.
The recommendations for how companies should disclose climate-related risks are an area of specific interest. The ‘TCFD statements’.
The requirements to prepare a TCFD report currently only fall on Authorised DC schemes and DB, DC and hybrid schemes with schemes with assets over £1bn. Nevertheless, this represents a huge amount of savers and savings.
The requirement for schemes in scope of the climate change regulations to prepare TCFD disclosures will increase transparency and accountability.
Twenty-three schemes published their reports by 31 July this year and we are expecting around another fifty to publish soon.
We are reviewing those and we’ll be providing feedback to industry to help with the preparation of future reports.
This will also help to inform DWP’s review of the scope and application of the climate change regulations later next year.
We’re encouraged by the efforts that trustees of most schemes appear to have made. We know that there are some challenges: for example, quality and availability of data, but those will reduce with time as TCFD reporting requirements cascade through industry and analytical techniques and methodologies develop.
My ask of trustees is to be mindful of these requirements and to make sure they are understood. They will become increasingly important.
APPT and PMI frameworks
Of course, these are not the only requirements that trustees must meet. In thinking of the breadth and variety of challenges facing trustees, I want to commend those professional trustees who have achieved accreditation under one or other of the frameworks provided by the APPT and the PMI.
Those frameworks, launched in 2020, were the result of a huge amount of work by both bodies and are undoubtedly of great value to those involved in appointing trustees. Accreditation should be a very positive factor in decisions about who to appoint.
We continue to encourage professional trustees to demonstrate their expertise, and especially their high governance and performance standards, by completing the accreditation process, as part of the development of a strong cohort of trustees into the future. I want today to encourage professional trustees, who have not already, to become accredited.
TPR Corporate Strategy
As CEO of TPR I have focused TPR on the long term. Our Corporate Strategy is guiding our evolution as a regulator, putting the saver at the heart of our work and ensuring we are ready for the challenges and opportunities before us.
They clearly orientate us to focus on the saver, and to ensure that we focus on the massive changes that have come and will continue based on the demographics of those saving into pensions and what types of schemes they are saving into.
Our strategy projects forward fifteen years. It seeks to ensure that we are ready for the emerging changes that will happen over this period.
Now, none of us has a crystal ball (and we will need to adapt our strategy in due course), but, as we say in the strategy, we can be pretty clear about the prospects for different groups of people and the implications of the long-term shifts from DB into DC.
The challenges and solutions required are different from those we have been used to. This requires us all to change focus and imagine challenges anew.
‘Challenges and solutions’ are the themes of this conference. That means change. Ironically, it’s one of the few stable points we can be sure of.
Whether we prompt it or are subject to it; everything changes all the time.
That’s true whether employer, pensions scheme trustee or regulator.
I also believe that this will require us to collaborate and work closer together. That has been another theme for us as a regulator over the last years.
Pensions dashboards
To be as nimble and responsive as savers need will require us to change our mindset. Working together on data, systems, products and concepts feels right to me.
During my time as CEO, I’ve sought to ensure our systems and ways of working are fit for the contemporary, and indeed future, pensions market. This has meant a lot of change; internally and externally. We are a more front footed organisation, more assertive and better at communicating. Providing information that both directs and supports. We are on a journey to become a data led regulator.
And ‘Data’ is also something we expect industry to get to grips with. Better data has the potential to transform our industry — to drive more efficient and better services for savers.
Better data helps everyone — savers, but also schemes — you need good data to have accurate valuations, to reduce errors and complaints, to automate your administration and reduce costs.
And pensions dashboards are coming. The legislation is clear and the technology will soon be in place and so schemes will need to connect. We know that this is a huge challenge but it’s one that must be met.
Dashboards should be on every trustee board’s agenda. Schemes need to digitise their records, check the quality of their data, and work out how they will connect. They need to speak to their administrators and other advisors to get moving.
We’ve provided guidance, and a checklist, to help them, and there is a webinar and a podcast out there as well. We are writing to all schemes at least 12 months ahead of their deadline, as a call to action.
In the background we are building the systems and processes we need to regulate compliance – because not being ready in time for implementation will have consequences. Our compliance and enforcement policy is being developed as we speak, and will be published for consultation soon.
Equality, diversity and inclusion
Our industry is changing and will need to continue to. It must take into account the different and ever more diverse profiles of savers. Which is why we have been pursuing the equality and diversity agenda with vigour. I cannot emphasise enough that diversity of thinking on trustee boards will lead to better outcomes for savers.
We have established a Diversity and Inclusion Industry Working Group, which seeks to engage and assist trustee boards and employers through the work of its four sub-groups. These cover data, research and innovation; standards and best practice; practical tools; and employer engagement. Last month we published an action plan which sets out the steps we, in partnership with the working group, will take to encourage and support trustees to recruit diverse candidates and create a culture of inclusion. We will also issue guidance by the end of this financial year.
I think there is still a job of work to do to convince trustees of the need to effectively consider issues of equality and diversity. These are not ‘nice to have’ matters, they are central to the successful management of schemes, the inclusion of everyone wanting to save and the longer-term sustainability of our industry.
Pensions Act
The work we are undertaking to bring life to the Pensions Act is helping us shape the medium term. There remain a few parts of the Act that are still a work in progress.
For instance, in a short while we will be ready to share with you details about the DB Code. My colleague David Fairs was speaking about this at this conference yesterday, so to avoid duplication I won’t go into detail here.
Whilst that remains to emerge, other areas of the Act are now in place — for instance we have implemented the CDC framework and its associated code of practice. We are reviewing TCFD reports, as I have already said, and many of our new powers are now in place. Changes to the notifiable events regime are yet to come, and we are busy working on this area also; I have already mentioned pensions dashboards.
Bringing life to an Act is complex and resource intensive. We have made a lot of progress in a relatively short amount of time. I must pay tribute to my team and all the stakeholders, including many of you, who have made this happen. Our whole industry is undergoing massive amounts of change and that is absorbing time and resource for everyone. There is more to do, but it’s right to acknowledge just how much has been achieved to get this far.
Consolidation
Likewise, it’s encouraging to see the emerging shape of superfunds, and while these are not yet on a statutory footing, the interim model we have developed enables them to come into existence.
The emergence of new models, alongside the now relatively mature Master Trust markets seem particularly relevant destinations for those small schemes for whom matters of scale and administration are an issue. Consolidation remains a positive, beneficial route for them.
And it’s happening relatively fast. Schemes of 12 to 99 members have fallen from 2260 in 2012 to 660 in 2022.
100 to 999 member schemes have fallen from 1030 in 2012 to 360 in 2022.
The benefits of consolidation and the acceptance of schemes that it produces a good outcome for savers appear to be growing.
It takes a lot for schemes to accept or perhaps realise that their work might be better undertaken by others. I do appreciate the emotional investment; the time and the effort it takes managing a scheme. But that partnership of interests must be of value to the saver. When it’s becoming less so, the answer may lie in consolidation.
Value for money
The next theme I want to touch on is value for money. We are working in partnership with the FCA and DWP to develop a framework for value for money (VFM) for all DC schemes. We have always benefitted from joint approaches to policy development, but our work with the FCA on value for money is of a different scale.
As we lean further towards DC, I believe this is essential. And our joint work on VFM is a massive step forward.
Currently, IGCs and trustees use a variety of methodologies and metrics to assess VFM. Inconsistent approaches to assessing value makes it difficult to compare pension products, which may lead to subjective decision making.
Our aim is to provide a standardised understanding of value via clear metrics.
This will allow more transparent comparisons to be made between pension schemes and enable them to compete on the overall quality of their offerings rather than on cost alone.
Providing VFM is particularly important for ‘double-defaulted’ savers who do not make an active choice about being enrolled or their default allocation and are therefore reliant on trustees and IGCs to maximise their retirement income for every pound they save.
Small schemes with assets under management of less than £100m are now subject to new statutory reporting requirements and must complete an annual comparative analysis of the value they deliver for their members.
If they cannot demonstrate that they are providing value for members, trustees are under a duty to either say how they will improve; or to begin the process of winding-up the scheme and consolidating into a master trust.
That reporting is about to begin. We will be looking at how these assessments have been conducted; making sure that small schemes that cannot demonstrate member value understand and follow-through on their duty to consolidate.
I’ve chosen to focus today mainly on strategic and overarching issues. On how it’s advisable for our industry to keep focussed on the longer term.
Cost of living
But I’m mindful of the overall theme of the conference; ‘Todays Challenges Tomorrows Solutions’ and the immediate challenge of the cost of living.
The cost of living is having an impact on savers. We have had feedback from our Saver Panel — of whom, more in a moment — of immediate financial and psychological effects.
Though the situation is relatively new, some savers already feel they can no longer afford to pay into their pension. Others may be seeking to access cash from their pension pot to pay essential bills.
We strongly advocate the importance of saving into a pension and we urge savers to maintain their pension contributions.
I know that the immediacy of economically troubling events and their destabilising frequency are a potent mix. Pressing enough to push individuals into making short-term decisions that could have long term consequences. But reducing or ceasing pension contributions are not an economically sensible reaction. The short-term benefits are slight, and the long-term consequences could be very significant.
If, in extremis, savers have no alternative, then our strong guidance is to seek advice before taking action. MoneyHelper is there to offer exactly this kind of support.
We do not want to see today’s challenges turn into tomorrow’s problems.
As a side note: I was pleased that our call for workers to blow the whistle on employers who encourage them to quit retirement plans was reported in the FT and other publications.
Employers who do induce staff to opt out of their pension plan risk enforcement action and fines.
Employees should sound the alarm if this is happening.
We want to know. Employer induced opt-outs are illegal.
Stakeholder panels
Before I close, a word or two on the panels that I mentioned.
The last time I spoke at the PLSA Conference I announced the establishment of three new stakeholder panels.
These were created to supplement our existing engagement activities. Providing a formal mechanism to give regular and strategic engagement with representatives of our key audiences.
We held a pilot phase between March and May this year, and I’m pleased to report that the panels for employers, schemes and practitioners and savers have met.
Early feedback from each concludes that we are doing the right thing by reaching out. There really is an appetite out there to work collaboratively to achieve good outcomes for savers.
The Employer Panel, made up of representatives from key employer bodies, welcomed the opportunity to be a critical friend, citing the ability to provide feedback on our employer communications and approach as a benefit.
Members of our Scheme and Practitioner Panel are experts in their field. Representing a broad range of scheme types and sizes, advisers and service providers. They saw the panel as helping to inform our policy making and timings, noting the plethora of regulatory change the industry has had to respond to recently.
The Saver Panel provides an important mechanism for us to hear the voice of savers as we progress and develop our strategy. Its members are drawn from consumer organisations, charities, and other groups representing a broad range of interests — ‘people’ experts rather than ‘pensions’ experts.
Following the completion of this initial pilot phase, we are further developing the design and aims of each panel and will agree a workplan with each one to continually inform and help progress our strategic plans and approach.
Conclusion
You may be aware that this will be the last time I’ll address Conference in my current role.
As I head into the last six months of my tenure as CEO, I’m mindful of work done and work to do. There are challenges and opportunities ahead; both for the regulator and the industry.
When I leave next March, I hope to look back with confidence that — under my leadership — the regulator made changes and laid foundations for future generations of savers. That we built on what we had, made change happened and prepared for further change and embraced innovation where we could.
Thank you
