Nausicaa Delfas, CEO of The Pensions Regulator (TPR), gave a speech at the JP Morgan Pensions and Savings Symposium titled 'Pensions regulation and growth'.
In summary
- Sound investment in diverse assets can improve outcomes for savers and generate growth for the UK economy. Economic growth and the interest of pensions savers do not have to be in conflict – in fact, they could be mutually reinforcing.
- Market and regulators need to work together to deliver this – through focus on value and access to high-quality investment products that are geared towards long term investment strategies.
- TPR is reducing unnecessary regulatory burden, supporting innovation in the interests of savers, and releasing funds for investment.
Good morning.
It is a pleasure to be speaking here again this year.
Reflecting back on the past year, it is good to see such a continued focus on pensions investment, building on initiatives already underway such as the Mansion House compact. And at TPR our evolution has moved on apace. Whilst challenges remain, these put us all in better position to meet them.
You have just heard the FCA talk about investment culture at the retail level and how that can enable good outcomes and economic growth – I will talk about the role of institutional investors in driving growth.
Over the last decade, the huge rise in UK pensions participation has been a real success story. 11 million more people are now putting something away for their retirements thanks to automatic enrolment. Somebody’s pensions pot is, or will soon be, one of the biggest financial assets in their lives.
But notwithstanding this achievement, the time has now come to make sure that the UK pension system as a whole helps individual savers to have sufficient savings to meet their needs at retirement.
Because despite saving for years, government data suggests that 12.5 million are heading for an uncertain future, and what they have invested may not be enough to give them the retirement they want and expect.
So what are we going to do about that?
I believe that all of us in the pensions system – government, regulators and the market – can have a huge positive impact on people’s lives.
The Pension Schemes Bill is an important first step towards making the pensions system work for everyone.
To grow people’s pension pots, and potentially the economy too.
But it is only part of the solution.
That is why today I want to talk about:
- growth and member outcomes
- why the two are not in conflict
- and how we as a regulator will play our part with you, in supporting a focus on value, and growth in savers’ interests
Growth matters
Economic growth is the bedrock of a thriving society.
Influencing the kind of jobs people do as well as the size of pay packets – growth makes sure that living standards are raised for each generation that comes after the last.
Some people consider pensions to be deferred pay. And a growing economy means better jobs, higher contributions, and options in retirement for millions of people.
Historically, UK labour productivity grew by around 2% per year. But since the financial crisis, research suggests that GDP per capita has grown by just 4.3% over the whole of the last 16 years. This lost growth shortfall amounts to some £5,000 per worker in the UK.
If growth is the question, then investment by UK pension schemes could be part of the answer.
Growth in pension savers' interests
The pension system in the UK is unique and over the last hundred years we have seen seismic shifts in provision and participation.
A past where at retirement a lucky few were given a gold watch and a guaranteed income.
And a future where you can count on many more saving, but the benefit is far from certain.
Although just 4% of defined benefit (DB) pension schemes remain fully open, there is still some £1.3 trillion of retirement income invested there – and across the market many schemes are in rude health.
More than 82% of schemes are fully funded and many are considering how to secure their future, whether that is an end-game or ongoing offer.
This is a monumental shift from the 2010s when deficits were endemic, and even a significant shift since 2021 when just over half of schemes were fully funded.
Given this context, the conversation has moved on, and the government is considering how schemes and employers could access the significant surplus funds that are across the market. To help ensure there are no unnecessary barriers preventing that money from being put to productive use, whilst at the same time ensuring members receive their promised benefit.
By contrast, the vast majority of savers are within defined contribution pension schemes – with 17 times as many active memberships in defined contribution (DC) than in private DB.
We may soon have 18 year olds investing for 50 years, a long time horizon, for their future.
And in DC we are also well on the road to a future of fewer, larger, 'mega' schemes.
Master trusts account for over 90% of members and 81% of DC assets, and our modelling shows that they are soon set to be supersized.
In 10 years’ time the master trust market will contain schemes of systemically important size. Seven schemes will have more than £50 billion of assets under management on a consolidated basis – four of which will be responsible for well over £100 billion each.
The decisions that these schemes make will not only impact the outcomes of millions of savers, but will also be able to move markets.
That is why we expect the highest standards of investment governance.
And we want all savers to benefit from appropriately diversified investments, and that this could not only boost savers' pots – it could also generate growth for the UK economy.
The two are not in conflict, and indeed could be mutually reinforcing.
TPR does not tell pension schemes where to invest. It is our job instead to make sure that those who govern people's hard earned retirement funds make decisions to optimise investment returns for their savers.
It is self-evident that savers benefit from a strong economy and that when institutional investors like pension schemes invest productively, they can contribute to making markets work well.
And many schemes can and do already employ sophisticated investment governance practices to enable them to invest in a broader range of asset classes.
This is borne out by recent PPI research that estimates 18% of the £3 trillion of pensions assets – across both contract and trust-based pensions – are held in productive assets.
And our own research this week shows that larger schemes are much more likely to be investing productively.
But many, often smaller schemes, are not.
Scale is important in terms of building the in-house capability needed to provide proper due diligence and manage, what at times can be complex investments.
But we also need to understand, collectively, what the broader barriers and trade-offs are to unlocking growth in savers' interests.
Increasing the value of pension funds
Transparency can help.
And I believe that well-designed regulatory policies with transparency at their core can correct market failures, promote equitable growth and enhance economic stability.
In the forthcoming Pension Schemes Bill our value for money framework has the potential to do all three.
In the wider financial ecosystem, pension schemes are uniquely placed to invest in the long-term.
But there are market dynamics at play which mean the priority is low cost, over higher or more stable returns – and it is savers who lose out.
Master trusts compete far below the 0.75% charge cap, with 83% of members across the whole market subject to fees of 0.5% or less.
Of course, high fees, with nothing to show for it, erode pots cumulatively over decades to leave savers poorer. But it is impossible to invest, or even to consider investing, in a broader range of assets – which could provide diversification benefits and higher returns – if the ceiling for investment costs is, as some say, below 10 basis points.
The value for money framework is an attempt to refocus competition on what should matter – outcomes. The returns and services received for the price paid.
Through public disclosure, we want to empower employers to really understand which are the best performing schemes.
And to pick and retender for their pension provision based on value not cost.
We want to help trustees to look across the market, see what good looks like, learn from other providers – their competitors – to drive continual improvement, and to make sure that all schemes in the market offer genuine value.
All schemes should be able to consider the full range of investment options, and as a regulator we will be helping to make that come to pass or encouraging those schemes to consolidate out of the market, where it is in the best interest of members.
We and the FCA have engaged with market participants over a number of years to try and get this right from the start. But value for money is complicated and there are lessons to learn from the implementation of similar regimes in other countries.
Too binary in implementation and you risk herding behaviours and stymied innovation.
Too flexible, and schemes will be marking their own homework.
What we seek is a middle ground which actually delivers better outcomes for savers.
Part of this will be in iterative policy development and practical implementation.
Learning and evolving the framework with you to meet the desired policy intent that all savers receive value for money.
We are currently engaging with many of you on how the mechanics of the framework will work in practice – the detail of which will be set out in any secondary legislation.
And we are also committing to work with master trusts and other large single employer trusts to encourage voluntary sharing of investment and asset allocation data this year and every year in the lead up to the implementation of the framework.
The framework is an important building block towards value.
But we need you here in this room to also play your part.
Enabling productive investment
Increasing transparency, and a focus on value, may mean the links between asset allocation and performance become clearer.
And to capitalise on any insights, trustees will need access to high-quality investment opportunities.
The market at large is innovating, and new investment opportunities are emerging, in particular to facilitate investment in the green transition.
A range of long-term asset funds (LTAF) have entered the market with a mix of investment opportunities, including in renewable energy and climate transition.
We want to see more of this, with asset managers and the investment industry responding to the challenge ahead and providing a range of investment vehicles which boost diversification and deliver better long-term outcomes for savers.
Pensions are uniquely placed to consider long-term returns, and I would urge you all to consider what more you can do in this space, particularly around transparency in performance and associated charging structures.
The government has also set out that it intends to develop infrastructure to meet the challenges of climate change. Its green paper, Industrial Strategy 2035, identifies that an additional £50 to £60 billion of capital investment is required each year through the coming decades to achieve the UK’s net zero ambition.
Pension schemes could provide that additional capital if the investments are in savers’ interests.
Of course, not all kinds of investments will be attractive to all pension schemes, based on the needs and wants of their members, their diverse goals and constitution.
But TPR will use its unique position in the market to engage with schemes and with government and help to clarify the profile of potential assets that would best align with different types of schemes' objectives.
To help identify the latent demand from the pensions sector in terms of the type, duration, equity or debt profile and size of investment.
And to help inform government prioritisation of infrastructure initiatives which may entice a flow of capital.
In my last few points, I will now touch on the work we are doing at TPR to meet these challenges: transforming the way we regulate, supporting market innovation, and reducing unnecessary regulatory burden, to benefit savers and UK economy too.
I mentioned last year that we were evolving to be more market focused, with new functions – these are now in place, and changes are gradually embedding.
Our major shift has been in adapting our regulatory model towards a more prudential style, particularly in our master trust supervision.
In designing this change, we conducted a 12-week pilot where we heard what market participants needed from us to deliver better outcomes.
This new approach creates tiers in our supervision based on risk, fosters multiple expert-to-expert touchpoints, brings greater clarity and transparency in our regulatory expectations, and fewer but more targeted data requests.
Through this we hope not just to be able to prevent harms before they occur – but also to support market innovation.
Supporting market innovation
Regulation has a role to play there, because to be genuinely innovative, market actors need to know what the guard rails are for innovation.
To understand the rules of the game and our risk tolerances so that they can invest with certainty in new product development.
In the past, we have supported new products and services to come to market, including superfunds.
But we want to establish closer, clearer and more proactive lines of engagement with innovators.
That is why this year we will develop an innovation framework and criteria to trial new ideas and set out how we can support you – and the processes to follow – so that there are no surprises on either side.
With this understanding we will then launch a hub to test a variety of innovation services with the market by the autumn.
Having visited a number of firms up in Edinburgh earlier this month, I know real progress is being made. I saw initiatives harnessing the power of data and in some cases, AI, which could have a real positive impact around member communications and supporting choice at decumulation in particular.
Good data and design are fundamental to market innovation. And through our newly launched data strategy we are also working towards common data standards, providing an opportunity for a free and safe flow of pensions data.
This is the bedrock of pensions dashboards – and our focus is on making sure that trustees have the right data hygiene in place before dashboards go live so people can trust what they are reading.
As the FCA has said, for pensions, dashboards will naturally turn people’s attentions towards value and investment considerations at a retail level and we all play a role in making sure this works well.
Reducing unnecessary regulatory burden and releasing funds for investment
The digital and data revolution provides wider opportunities to reduce unnecessary regulatory burden.
As those of you involved in DB schemes know, in support of the new DB funding regime, we radically reduced our data requirements and we are 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.
Over the coming year we plan to go further and conduct a broader review of our scheme return and supervisory returns, to rationalise and remove unnecessary burdens on schemes.
This is part of a broader review of our regulation.
One area in particular is our capital reserving requirements – currently across the master trust market, schemes hold between £350 to 400 million of reserves to cover the costs of providing services during a triggering event.
Currently a minimum of 15% of these reserves must be held in cash, which cannot be invested productively, with the rest made up of other forms of securities.
The current scale and expected rapid growth of master trusts means this buffer could be unnecessarily large.
That is why over the year we will review our requirements, to make sure our ask is proportionate and implement any changes which could free up millions of pounds in productive capital without posing significant risks to savers.
The next steps
I started by talking about the challenges we face as the pensions industry and the challenges we face in the broader economy.
How do we ensure that people, after many years of saving, have enough income to support themselves in older life?
And as a country, how do we ensure that there are not unnecessary barriers to investments that unlock productivity and growth for all?
In our response to the Prime Minister, that we publish today, we set out that we do not believe the two to be in conflict and can in fact be intrinsically linked.
Provided the right balance is struck we have an opportunity to do both.
We have set out as a regulator how we will play our part. But this task is not ours alone.
It is up to all of us to make growth in savers' interests a reality.
Thank you.
