OPDU Report 27 June 2010 - Annual Risk Conference Special Edition

Expectations of the industry… and what you can expect from the regulator
Bill Galvin, Interim chief executive, The Pensions Regulator

Bill Galvin, Interim chief executive of the Pensions Regulator looks back over some of the key points of Tony Hobman’s speech to the OPDU Annual Risk Conference, considering the expectations the regulator has set out for the industry, as well as taking a look ahead at what the industry can expect from the regulator going forward.

It has been a year when the relationship between pensions and UK plc has been brought into sharp focus. As a regulator we have had to be flexible and adaptable in dealing with the challenges and risks that arise during a period of economic uncertainty, whilst retaining a strong focus on the key risks to members’ benefits.

It was against this background that we addressed the OPDU Conference in March, setting out both The Pensions Regulator’s expectations of the industry and what the industry can expect from us in the coming year. So what can you expect us to focus on in the next 12 months?

Reducing risks to DB scheme members

The prudent funding of DB promises will be a regulatory priority for us for many years to come.

Back in October 2008, we set out our stall on DB funding in response to the extra pressure on both schemes and trustees caused by the downturn.

Prudence and flexibility remain at the heart of our expectations. We explained that we saw no case for lower levels of prudence in setting realistic funding targets, but we signalled a willingness to consider flexibility in negotiating how that target will be met by the employer - where there are genuine issues of affordability, and where immediate cash demands could damage the employer's ability to provide ongoing support to the scheme. We made it clear, however, that in such circumstances, the pension scheme's position as an unsecured creditor meant that trustees should ensure any dividend paid did not weaken the security of the scheme.

We have already seen positive behaviour changes in these areas and hopefully this will continue.

But we know that many difficult conversations remain before us, this coming year. The funding negotiations happening now will be based on valuations carried out in the depths of the downturn. Many schemes will be having difficult discussions with sponsoring employers. And we expect trustees to be robust in their approach.

This does not mean being reckless or unnecessarily demanding. We stand by our view that the best ongoing support for a scheme is a viable employer.

Measuring and assessing the employer covenant

The willingness and ability of the employer to support the scheme is a key factor we expect trustees to look at when negotiating funding plans. It is also a primary consideration for us when we look at how appropriate funding targets and recovery plans are to the scheme and employer.

Going forward, we expect trustees to continue using this assessment as a core consideration in funding negotiations. We want to make sure that trustees are measuring the employer covenant regularly; that this is an ongoing and dynamic process; and that trustees know what actions to take if and when the covenant changes.

We will publish guidance later this year on measuring and assessing the employer covenant.

 Improving governance and administration

We have shone the spotlight on administration and governance practice over the last few months. This will continue as we seek to raise standards further.

One of our sharpest areas of focus will be on record-keeping. We set out our initial expectations early in 2009, hoping that the industry would voluntarily adopt good practice in the area, bringing standards in data management and accuracy up.

Unfortunately, this has not happened. So in response we have now set out some very clear and explicit expectations around the standard of record-keeping we want to see.

Good quality data, whilst not a headline-grabbing issue, is vital to the success of a scheme. Without it, the ability of trustees to fulfil their key obligations – such as knowing which members are eligible for a pension, how much they are due and when – is severely undermined.

The target accuracy for all new data collected from this year is100%, and for legacy data - the data already on file - the target is to be 95% accurate by 2012. If data is not sufficiently accurate we expect schemes to put plans in place now to rectify the issues.

We know that bringing legacy data up to date may not be easy, but accurate data is an absolutely vital element in making sure that pension schemes are well run and that they provide a safe vehicle for members to save for their retirement.

Not only are we planning to carry out spot check audits on schemes to ensure that data is up to scratch, but such is the importance of the issue that we have also made it clear that if appropriate standards are not met we will be willing to use our enforcement powers if necessary.

With up to 9 million more members due to be auto-enrolled into pension schemes from 2012, the volume of records will increase dramatically and the challenge will get much bigger. We all need to make sure that we are ready and able to cope with the influx.

Reducing risks to DC scheme members

This year will see us taking a fresh look at the risks facing DC scheme members and at our regulation of the DC market as a whole. This will enable us to better define existing and new risks, as well as who is accountable and responsible for mitigating them.

We intend to share with the industry some of our early thinking on what the new DC risk framework will look like later in the year.

Increasing the industry’s focus on DC is absolutely vital. The DC market is already growing in prominence. As employers continue to reassess the future of their DB provision, we can expect more and more members to shift to some form of DC pension.

Our expectations for trustees remain simple. They should ensure that members receive clear, straightforward information about the options available to them for turning their savings into a retirement income. This includes offering the open market option.

We know that many members will choose ‘the easy option’ - often because of low levels of financial knowledge or confidence. In response to this it may be useful to offer members access to independent financial advice to help them to make these important decisions.

As to our expectations of employers, we know that they can play a very important role in helping their employees to understand and make decisions about saving for their retirement. Research shows that employees trust their employers to give them information and advice about saving, and may well be a first port of call for many of the queries members and other employees have about pensions. This is especially the case in the DC environment, where there are so many more complex decisions for employees to make.

Although employers do not have a legal obligation to provide support, we hope that they will recognise the positive difference they can make to their employees’ understanding.

To help employers to feel comfortable in talking to their employees about pensions, we will continue to provide tools and support – like our employer guide ‘Talking to your employees about pensions’.

Preparing for 2012

Tied in closely with our focus and expectations around DC is our growing understanding and clarity around what auto-enrolment will mean for employers and schemes on a day-to-day basis.

We will make it very clear exactly what we expect employers to do and when - and this process starts later this year when we will publish our draft proposed enforcement strategy for dealing with non-compliance with the new employer duties.

Our expectations of employers and schemes at the moment are straightforward. We want employers to be clear about when they will be called upon to carry out their new duties and, once they know that, to think about what their pension provision will need to look like to satisfy the auto-enrolment requirements - whether that means changes to their existing arrangements or organising pension provision for the first time.

Employers can easily find out when their new duties begin by looking on our website.

For trustees it’s the same. We want trustees to look at their scheme and to consider whether it will meet the statutory requirements or whether changes might be necessary and how these might be implemented.

Finally, we want to see advisers getting to grips with the requirements so that, in turn, they can help their clients to be ready.

You can expect to hear us talking a lot more about employer compliance over the next year, as we increase our communications activity with employers and the wider industry.

Better regulation

Last year we were reviewed by the Better Regulation Executive to assess whether our approach to regulation adheres to the principles of Better Regulation.

The BRE / NAO report, which was published in January, was positive about our approach to proportionate, risk-based, transparent regulation.

The report concluded that while we have made relatively little use of formal enforcement action thus far, the other methods we use – such as talking through issues with sponsors and trustees, supported by the threat of using our powers if necessary - have an equivalent effect in practice.

With more discussion of individual company pension schemes in the media, we have been asked whether we are deliberately stepping up the use of our powers.

The short answer is no. We have taken the same approach to the use of these powers since TPR was set up in 2005. However, we do use our powers more often than many people think.

In our response to the Hampton review, we published figures showing that between 1 April 2008 and 31 March 2009 we used our powers in 787 of the 4,747 cases and enquiries which were active. And in the following six months, 1 April 2009 to 30 September 2009 (the latest figures available), powers were formally exercised in 798 of the 3,272 active cases and enquiries.

During that period we have appointed Independent Trustees, prohibited trustees, granted clearance, and worked with other regulators to share important information.

We find that resolving issues through discussion and negotiation – backed up via the threat of our powers - can be very effective. But it’s inevitable that some of our regulatory activity will appear on the business pages of the newspapers. For example where there are court cases or decisions by the regulator’s Determinations Panel.

We will still focus primarily on education and on enabling trustees and employers to carry out their role to the highest possible standards. We hope that this approach will continue to mean that we can, in most cases, avoid having to resort to enforcement.

However you can be sure that we stand ready to take firm action to make sure that members’ benefits remain protected.

Bill Galvin
Interim Chief Executive
The Pensions Regulator