Patrick Coyne, Interim Director of Policy and Public Affairs, delivered a keynote speech at the Pensions Age Conference entitled 'Innovation in pensions'.
Key messages
- To deliver good outcomes for pension savers we must foster greater collaboration and innovation with the industry to help make sure that after 20, 30, or 40 years of pension saving – it was really worth it.
- That is why we plan to launch a new innovation hub during the summer and facilitate and test a range of innovation services with the market.
- Improving data quality is the first step towards sparking innovation and is a key regulatory priority. And through the hub we will focus our efforts on two areas in particular: emerging models and decumulation.
- Our goal over time is to enable emerging models to come to market in a slicker, quicker way by introducing a step by step and transparent process for engaging with TPR.
- And for decumulation, we want and need a sat-nav for retirement – a dynamic system that guides the way, adjusting for people and where they want to go.
Good morning.
I'm very pleased to be here today to talk to you about an increasing priority for us as a regulator.
Over the last two years many of you will have heard TPR talk about its missions: to protect savers' money, to enhance the pension system, and to support innovation in savers' interests.
And today, I want to talk to you about the third of these missions.
Innovation.
Regulation and innovation. Two words that not many people instinctively think fit well together.
But what if I said that the former was a prerequisite for the latter?
That an appropriate regulatory framework, clear guard-rails and a level playing field provide the spark needed for inquisitive minds to shine brightly.
And that in a swiftly evolving industry like pensions, we now have the chance to look at things differently.
To harness the potential of new ideas, products and services and make sure as an industry we deliver on our purpose.
To provide the millions of people who entrust their savings to us with an adequate income to support themselves in older life.
So today, I want to talk to you about:
- why innovation matters to us as The Pensions Regulator
- how we will support innovation in savers' interests
- and identify the areas where innovation could really make the system work for everyone
Why innovation matters
TPR was set up exactly 20 years ago, when the world and pensions landscape was very different.
Social media was more like waving while watching TV, than a multi-billion pound industry.
Arsenal, believe it or not, were the Invincibles.
And the workplace pensions landscape was one where there seemed to be fewer and fewer savers, and almost all of whom were in defined benefit (DB) pension schemes.
Fast forward to today and we face a very different picture.
Automatic enrolment has made pension saving part of 8 in 10 workers' lives.
And there are 17 times as many active savers in defined contribution schemes than in private DB.
This shift presents different challenges to us as a regulator.
And brings a shift in our role.
We know that the public expects us as TPR to help make sure that they get a good outcome from pension saving.
And in a world of defined benefit a strong set of rules and a sole focus on compliance would generally have seen good outcomes come to pass.
The employer would pay the promised benefit.
But in a world of variable benefit – where contribution levels and value for money have a large say on outcomes.
100% compliance with regulations won't be enough.
Because harms can occur – to markets and savers – where no breaches of regulation take place.
Where everybody complies, and yet nobody thrives.
So, we think that to fulfil the public’s expectation, we must change the way we work as a regulator, using a different regulatory toolkit.
We have to really understand the market picture.
To use a rich evidence base and regulatory dialogue to make sense of the complex financial ecosystem and where the risk and opportunities lie for savers.
We have to use that insight to clearly set out what we care about. And then be as transparent as possible on the outcomes we seek for savers so there are no surprises in our approach.
And most crucially seek greater collaboration and innovation with the industry to help make sure that after 20, 30 or 40 years of pension saving – it was really worth it.
Innovation services
That is why we committed to the Prime Minister, as part of the wider government focus on growth, that we would set up a new innovation support service.
Our plan is to launch a new innovation hub during the summer and facilitate and test a range of innovation services with the market.
We define pension innovations as: changes and improvements to pensions which enhance saver outcomes.
And we want our regulatory framework to help stimulate new ideas and support what’s already there.
To provide certainty to businesses – schemes and administrators but also software and technology providers – that when they put money into research and development, they are not wasting their time.
And to help market participants know and access a clear process which enables new products and ideas to market in a way that is cost efficient for them, and always in savers' interests.
Over the last few months, we've been exploring with trustees, administrators and innovators in the marketplace what they saw as the barriers to innovation.
You will not be surprised to hear that the number one barrier that came up was the quality of data.
Improving data must be the first step
People told us that they wanted to automate.
Things which were top of mind for some with automation included member transfer values and retirement quotes.
To make things quicker for savers and more efficient for their schemes.
But if the data going into the system isn't up to scratch, you're automating rubbish.
I recognise that in a long-term industry, with member records that goes across many decades, getting good quality data has not been easy.
And that across the market there has been a squeeze on administration.
Downward pressure on cost resulting in a historic lack of investment.
And a culture where we haven't valued the essential services that administrators provide.
But this has to change.
As a regulator, we are playing our part, particularly in the defined contribution (DC) system through our forthcoming value for money framework.
But all of us have to make the collective case to invest and harness the transformative potential that the digital and data revolution represents.
Here and now, improved data can have an impact from the off.
In defined benefit schemes, it can lead to more attractive end game options and improved member services.
And in DC, improved data quality is likely to aid informed investment decisions, improve member choice and also make small schemes more attractive to master trusts giving them greater choice in consolidation should they wish.
But in the future, the opportunities are almost limitless for innovation and creativity in service provision for those who want to deliver more for savers.
Dashboards presents an enormous opportunity for us as an industry to radically reform our data standards.
But it is also an enormous task when 48 million members are in scope and one in four schemes still have some form of non-digitised data.
Through our guidance and scheme outreach we are doing all we can to help schemes with this incredibly complex process.
And industry has responded with 8 in 10 schemes reporting to us that they are on track to meet the schedule for connection.
Dashboards is the culmination of many years work in improving data standards.
We first set our expectations around record-keeping in 2010 and embedded these within our new general code last year.
This has given us some foundations to build on.
From October last year we have also been reaching out directly to schemes to ensure that they have the right processes in place around measuring and improving their data.
So far, we have reached out to just under 800 schemes.
And yes, we are here to support them, but we will also be challenging those who refuse to meet our expectations, backed with the swift use of powers if schemes do not comply.
Given that dashboards has already started to move the dial on data.
We want to keep the momentum going.
To help industry capitalise to improve services, access new opportunities and spark innovation.
Our data strategy published earlier this year set out a blueprint to make this vision a reality.
We will now be working across the whole industry to drive consistent, coherent and, where possible, open standards for data on metrics that matter.
And we have welcomed colleagues from across industry engaging with us and providing their thoughts on how we could most effectively convene stakeholders in a practical, proportional and beneficial way.
Our approach will mean higher expectations of the pensions industry. But in return you will see us deploy more modern data practices which will reduce regulatory burdens.
And see us make available, coherent, consistent data which can help you improve your service provision and spot new opportunities for your business and your savers.
This spring, you’ll see our new approach in action.
To help schemes comply with the DB funding regime, we not only radically reduced our data requirements, but are now bringing in a new semi-automated digital submission form.
This not only gives us the information we need but saves schemes paperwork and countless people-hours. Letting you get on with the job of delivering for your members.
And more is to come to help support market innovation.
Supporting new products to market
Data was not the only barrier to innovation that industry told us about.
People with good ideas for new models of service provision also told us they weren’t sure how to get us – as a regulator – on board with their ideas.
We're really proud to have supported a new form of pensions provision to market over the last few years with superfunds1.
Working in advance of a legislative framework we brought in an assessment regime and helped Clara become the first kind of superfund model.
As a result, over 20,000 savers and around £1.5 billion of money is in a more secure DB vehicle.
Throughout this process, things weren’t always perfect and there are times we could have been clearer in our engagement.
But we learnt a lot – insights which have helped us support the government in developing a legislative framework for superfunds that will be brought in by the Pension Schemes Bill.
Next month, we also plan to publish DB endgame guidance which will help trustees consider the broad range of alternative models which are now in the marketplace.
Now we want to go even further to help the next big idea get off the ground.
We have shown through superfunds we have an appetite to encourage innovation, but we also recognise that we can do this an even more clear and systematic way.
Our goal over time is to enable emerging models to come to market in a slicker, quicker way by introducing a step by step and transparent process for engaging with TPR.
Rather than starting with issuing a lot of detailed questions, we will seek to explore the outcomes you want and the art of the possible within the regulatory guard-rails for getting there.
Our door will always be open for early, informal discussions.
That way, if there are concerns with the direction of travel in a product, you can understand what they are early on and adapt your designs or move onto other ideas.
Where we really want to support
Alongside new models we are very keen to support innovation in administration and membership experience.
One area in particular is an important priority for us as a regulator.
Decumulation.
Helping people after a lifetime of saving, to access their money in a way that suits them. Appropriately supporting them in their choices.
And people do definitely need help.
Three-quarters (75%) of DC pension holders aged over 45 do not have a clear plan on how to take their money or even know that they have to make a choice.
And when they do, they don’t seek advice, or often, even guidance.
That is because for decades, our pension system was like hopping on a train.
You followed a fixed route, and at retirement you arrived at the destination – a guaranteed income for life.
The journey was predictable, and people didn't have to make many decisions along the way.
But in a world of defined contribution, retirement isn't a single destination – it's an open road where people can go in different directions and might face bumps along the way.
Yet, we still act like our savers are waiting at the station.
We need a sat-nav for retirement – a dynamic system that guides the way, adjusting for people and where they want to go to.
Innovation in decumulation means moving beyond a one-size-fits-all approach.
It means turning a pot into a pension, with an income stream that supports people throughout their retirement years.
It means flexibility, suitable ongoing guidance, and tailored, guided retirement pathways to ensure people are empowered to make the best retirement decisions for them.
And where they are unwilling or unable to make a choice, that there is a default safety net which means their money is well managed in the interim and can provide a regular income.
The government plans to introduce a new Guided Retirement duty in the forthcoming Pension Schemes Bill.
That will mean that trustees are required to either offer or partner with a provider of decumulation services.
This is the automatic enrolment system growing up and turning from a savings system to a pensions system.
And you know what?
For many people, I am sure that what they are looking for is still some form of regular income for life.
That is one reason why we'd be interested to see how the CDC market might develop in the UK if there is demand for it from employers.
But different groups of savers might want different things.
And as a regulator we want to help schemes and innovators as they think about a broad product mix now so that when the requirements come into force – the market is ready to go.
We know this isn't easy – and that having a view of somebody's broader financial wealth is going to be vital in guiding suitable retirement journeys.
As a regulator we don't pretend to have all the answers.
But in working together, with a clear vision to support savers in retirement, I want us to help empower innovators, provide clarity in product design and bring solutions to market which means the system really works for savers.
From joining a pension – right the way through retirement.
Conclusion
So, there you have it.
Regulation and innovation.
Two words that must go together if we are to build a system that works for everyone.
Thank you.
1 Read our 'How to make transferring to a superfund run as smoothly as possible' blog
