Nausicaa Delfas, Chief Executive of The Pensions Regulator (TPR) gave this speech at the DG Publishing Private and Public Pensions Summit.
Key points
- We welcome the bold reforms announced by the Chancellor at Mansion House, which will accelerate the move towards a market of fewer, larger pension schemes, better equipped to deliver for savers and invest in the UK economy.
- As the pensions market changes, we are changing too, shifting to a more prudential-style of regulation, addressing risks not just at an individual scheme level, but also those risks which could impact the wider financial ecosystem.
- We are completely restructuring how we approach defined contribution supervision, with tiers of engagement depending on the risks schemes present to the market and saver outcomes.
- At the same time, we are investing in digital, data and technology and embracing new ways of working across the organisation seeking to drive efficiency, automation and innovation.
- Across all of our work our priorities are: investments, data quality and crucially, trusteeship.
Good afternoon. Thank you for inviting me to speak today.
I’m going to talk about changes in the pensions landscape, our regulatory priorities, and how we are moving towards a new style of regulation.
Since the early 1900s, Britain has had some form of pension provision. Workplace pensions have been around for over a century, spurred in part by the Finance Act 1921 which provided tax-relief on contributions.
And over the years, we have seen wave after wave of change in priorities, provision, and participation in pensions.
Now, with the forthcoming Pensions Bill and the government’s two-part pensions review, I believe that we have a unique opportunity to look ahead and make sure pensions truly work for everyone.
Why pensions need to change
And as a sector, we need to change.
Automatic enrolment has been a fantastic success. It has created a nation of savers with more than 8 in 10 workers now investing in a workplace pension.
But government research suggests that 12.5 million are under-saving for retirement.
There are many reasons for this.
People are living longer and face cost-of-living pressures.
We have falling trends of home ownership and a generation of people who missed out on defined benefit pensions and have only been automatically enrolled into a defined contribution pension much later in life.
These issues are particularly acute for those born in the 1970s, for women, and for low to medium earners.
And this complex picture means many are wondering if future generations will have enough income to support themselves in later life.
Mansion House reforms
That is why we welcome the bold reforms announced last week by the Chancellor at Mansion House, which will accelerate the move towards a market of fewer, larger pension schemes, better equipped to deliver for savers and invest in the UK economy.
Proposals include a minimum size for automatic enrolment default arrangements, easier mechanisms to consolidate, and a renewed commitment to making publicly available, objective performance data to help employers and schemes understand value for money in defined contribution schemes.
Provided these are implemented with thought as to how to ensure innovation and new market entrants, these proposals could have significant potential benefits, creating a thriving and competitive pensions system which has the potential to make a real difference to people’s lives.
Even without government intervention, our modelling shows that in 10 years’ time the master trust market will contain schemes of systemically important size.
Seven schemes with more than £50 billion assets under management on a consolidated basis, four of which will be responsible for well over £100 billion each.
That means we at TPR are shifting to a more prudential style of regulation, addressing risks not just at an individual scheme level, but also those risks which impact the wider financial ecosystem.
We are entering a different era of regulation, that protects, enhances and innovates in savers’ interests.
An era where we can help to ensure that all savers – from every walk of life – will get good retirement outcomes from pensions.
Our priorities
To make this a reality, we must create the conditions where:
- 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
- and all schemes are well-run by excellent trustee boards with high quality data powering informed decision-making
And to deliver these outcomes, our priorities are on three key areas: scheme investments, data quality and, critically, trusteeship. I’ll take each of these in turn.
1. Investments
People pay into a pension and trust that at the end of many years’ saving, they will get something that was worth it.
In defined benefit, that means a member gets their promised benefit. In defined contribution, it means savers get real value for money.
The key factor in determining whether this happens or not, is the quality of a scheme’s investment governance practices.
That is why we are stepping up our focus on investments across both defined benefit and defined contribution pension schemes. This will matter to you, and it matters to us and so we want a genuine dialogue through our supervisory approach to the benefit of savers.
To be clear on what we think good looks like here: we want to see genuine and adaptive strategic decision-making:
- where there is a clearly defined objective for your investments and for the savers within your scheme
- where there is regular comparison of real-world returns with forecasted models
- and where, crucially, trustees adjust their strategy to make sure investment objectives for savers are being met
We work in a long-term industry, but it cannot be right to say “only judge me on my performance after 30 years”, as that could be too late. We need evidence that you are making the right calls along the way.
And so, while we do not want to drive short-term decision making, we do want forensic eyes regularly looking at performance, discussing and documenting the rationale for sticking to the plan or making a change.
Different types of schemes will, rightly, be seeking different investment goals. We would certainly expect to see stark differences in the investment strategies of a mature DB scheme compared to the growth phase of a DC default arrangement, for example.
But what matters is that those schemes are making the right decisions for their savers.
Our job is not to tell schemes how to invest, but instead to ensure that trustees have the controls and capability to genuinely deliver for savers.
The government’s research suggests that between £25 billion to £50 billion is the tipping point for a scheme to enter direct investment in a wider range of alternative assets.
Properly considered investments into private markets do have a role to play in a diversified portfolio.
Some schemes are experts in private market investments, particularly large open DB schemes, but we want to enable all schemes to have the ability to invest in a broader range of asset classes if it is in their members’ interests to do so.
That is why we published our private market guidance earlier this year, to make sure trustees are challenging themselves and their advisers to consider investments that have the potential to deliver for savers.
But where schemes are not capable of meeting the highest standards, we support and will actively advocate for consolidation in savers’ interests.
Scale is not the entire answer in itself: a poorly run large scheme is still a poorly run scheme. And we have seen superb small innovators in the DC market in particular, deliver good returns and launch products which spark competition.
But in general, we have seen that scale can bring benefits.
Not just in economies of scale – where international evidence shows clear cost efficiencies in schemes as they increase in size up to £500 million in assets under management.
But also, governance, where across both DB and DC our surveys have consistently shown larger schemes have higher standards.
2. Data quality
Good investment decisions are predicated on good quality data.
Good governance decisions require good quality data.
To be assured savers’ interests are being met, as a regulator we need good quality data.
So, it should not surprise you that another of our priorities is raising data standards across industry.
Last month we launched a new Digital, Data and Technology strategy. It aims to reduce unnecessary regulatory burden, enable effective market competition, and benefit savers through supporting industry innovation.
As part of this we will be urging the pensions industry to work with us to drive up adoption of latest technologies and data standards.
We appreciate that trustees may feel that they are pushing their administrators to do more but are not able to influence better practices. So collectively we must work together, and with administrators to understand how we can raise standards for all.
And we recognise that for many years pension administration has been under pressure, with costs driven low, and service provision stretched.
This is why we have recently extended our engagement with the biggest administrators.
Our data indicates that 47 of the largest commercial and non-commercial administrators cover 90% of memberships and we are inviting 10 to 15 of these administrators to voluntarily collaborate with us to understand how they operate and mitigate systemic risks where we find them.
It is not just in savers’ interests that schemes have data that they can trust – there are solid business cases for all schemes to make the transition towards validated secure and open standards of data.
- If you are a scheme seeking buy-out – what is one of the largest factors in the price that you are offered? Data quality.
- If you are a scheme considering consolidation, what is one of the biggest barriers? Data quality.
- And with pensions dashboards no longer on the distant horizon – the time is now for schemes to get their houses in order.
We will be writing to all chairs of trustees several times in the year leading up to their connection date setting out the clear actions they must take. Schemes must not assume that their administrator has this handled. Trustees are accountable and we expect you to keep track of progress, manage risks and keep records of what you are doing to make sure you comply.
I’d urge you not to think of dashboards only as a burden, but also an exciting opportunity for innovation if we get this right.
We will be as transparent as possible in our expectations to help you comply. But should you choose not to act, don’t be surprised if we then take action.
3. Trusteeship
And finally, onto our most important priority, raising the standards of trusteeship.
As we move toward a more consolidated pensions industry, the nature of trusteeship is changing.
Boards must be able to synthesise a broader range of data and translate them into strategic action, as well as managing increased expectations from members and us as a regulator.
Our general code has set standards we expect to see in terms of trusteeship. The obligations are clear.
You must have knowledge of pensions, act in savers’ best interests, and comply with your duties.
But what does good trusteeship look like?
A good trustee must have a sharp, and critical mind, and the ability to constructively challenge.
If you look at any industry, or any company that is successful, they have a balance on their decision-making boards. People expert and skilled in their industry, those working in the company, and those independent voices who bring experience from other industries.
And they are brought together to challenge one another to get the right outcome.
As the system shifts towards fewer, larger schemes, the need for critical challenge becomes ever more important. And as a regulator we must be assured that this diverse challenge is there.
You should expect us to be holding people to high standards and really understanding how your trustee board is operating.
Our first step is to go into the market to look at how trustees are operating, in particular, the 10 professional trustee firms that now govern over £1 trillion of assets under management.
Before Christmas we will have established formal relationships with each of these firms. Our goal is to understand good practice but also identify risks including but not limited to: ownership structure, skills and experience, knowledge and understanding, diversity, equality and inclusion, conflicts of interests and fees.
We see real benefits in professional trusteeship in terms of the ability to raise standards. But we must also guard against risks.
For a small, closed DB scheme, I can of course see the real and practical benefits that an all-encompassing trustee firm could provide. Pensions management, project management, communications services, procurement, data services, and fiduciary management oversight – a one-stop shop.
But clearly there is an inherent risk of conflict of interests when these firms offer ancillary services, which needs to be carefully managed.
We want to make sure that buying decisions are always made because the service is best for members, not best for the firm.
That is why we really need to understand how these businesses operate to ensure savers are protected.
This evidence and insight will help both us and government, to form a picture of what the regulatory framework for trusteeship will need to be in a changing pensions landscape.
We are open to considering all options to keep savers safe – whether that is accreditation, authorisation, or something entirely new for pensions.
The move towards prudential-style regulation
In delivering on our priorities and for savers we must continue our move towards a different style of regulation.
The public expects us as The Pensions Regulator to help to deliver good outcomes from pension saving.
To fulfil the public’s expectation, we must change the way we work as a regulator, addressing key risks wherever they arise, using a different regulatory toolkit.
Not only understanding and helping to mitigate risks within individual schemes, but also risks across the market and wider socio-economic landscape.
That doesn’t mean acting outside our powers but operating in a different way.
Using 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.
Many of you will have already noticed that our approach to market engagement across both DB and DC has changed, with more direct interactions between our respective technical experts in supervision and more nuanced discussions around your strategic decision-making.
We are also now completely restructuring how we approach defined contribution supervision.
This will move us towards a model which groups DC schemes into four segments with particular characteristics: monoline master trusts, commercial master trusts, non-commercial master trusts, and single Employer trusts and CDC schemes.
These will have tiers of engagement depending on the risks they present to the market and saver outcomes.
Staffed by our colleagues with expertise across investments, governance, financial analysis and other key commercial skills, our teams will engage with you on an expert-to-expert basis, really understand how you operate, and uncover risks and opportunities to the market at large.
At the same time, we are investing in digital, data and technology, as set out in our newly published strategy, and embracing new ways of working across the organisation to drive efficiency, automation, and innovation.
There will always be a need for market participants to give us evidence.
But to reduce unnecessary burden we will be transparent on why we ask for information, look very carefully if we can get it from anywhere else, and if not, eliminate friction in how you provide it.
We’re open to feedback and want to hear where we might scale down our regulatory asks where they are not to the benefit of savers.
We also recognise that to ensure that savers get good outcomes from pension saving we must enable effective competition and foster innovation across the sector.
The space to learn and iterate, and certainty of the regulator’s expectations, are important catalysts for innovation.
That is why we are growing a team of innovation professionals and are putting in place a 'pensions market innovation hub' to review ideas at an early stage and to provide guidance on our red lines and risk tolerances.
This will provide the regulatory guardrails and enable safe experimentation of new business models and pension technologies, improving market competition and value.
Taken together, all these new regulatory approaches will mean that employers, schemes, administrators, and firms will see more of us, but I hope you will also see the benefit of the interaction.
So, to conclude – the pensions market is changing, and so are we.
Together, we have a unique opportunity to look ahead and make sure pensions work for everyone. Let’s not waste it.
Thank you.
