Nausicaa Delfas, CEO of The Pensions Regulator (TPR), gave a speech at the TUC’s Pension Conference titled 'The changing face of trusteeship'.
Audience: A mixture of trustees, trade union officials and reps, and policy professionals.
Themes covered: Pensions Schemes Bill and scale, investment governance and value, trusteeship and professional trusteeship
Length: Circa 20 minutes
Good afternoon.
After decades of hard work, a good pension provides people with confidence, empowerment and security in older life.
And in the pensions world we are at an inflection point – a point at which we have the chance to build on the successes of the past to make pensions work for everyone.
So today, I want to talk to you about:
- The pensions challenge facing us as a society – the need to make sure that after 20, 30, or 40 years of pension saving, that people have enough to support themselves financially in older life.
- The reforms soon to be implemented in response – leading to fewer, larger pension schemes which have the potential to better deliver for savers, and also potentially for the economy too.
- How we as a regulator will make sure that savers’ interests are maintained in this transformation through trusteeship.
- And what together this means for workers up and down the country – a value for money pensions system, with the ability of people to make informed decisions which are right for them.
The context
By the early part of this century, Britain wasn’t saving.
In 2006 only around a third of all employees were saving into a pension and as a result more and more people would be reliant on the state pension.
And at the time 60% of employees aged over 35 were on course to have insufficient income to support themselves in older life.
Policymakers had to act – and the recommendations of the Pensions Commission in 2005/06 paved a path towards automatic enrolment.
A multi-year endeavour from across the political spectrum, this reform has created a nation of pension savers.
More than 8 in 10 workers now invest in a workplace pension, many for the first time.
And the overwhelming majority of employers are complying with their duties paying benefits in full and on time every month.
This is a fantastic success story – but one that is only half written.
The challenge remains
Because many people still face uncertain outcomes in older life.
And while we have a much more diverse group of savers putting something away for the retirement, government research suggests that 12.5 million are still under saving.
This is because as a society, people are living longer, face cost-of-living pressures, and often have caring responsibilities for children, parents and even both at the same time.
We have falling trends of home ownership, and the cost of rent is increasing.
And we have a generation of people who were never offered a pension when they joined the workforce. Who missed out on the defined benefit pensions offerings that were available to some. And have only been automatically enrolled into a defined contribution pension much later in life.
Across Britain, many face some or all of these issues, but research suggests that they are particularly acute for those born in the 1970s, women, and low to medium earners.
So, for the next chapter in pensions, our mission is to build a system that works for everybody.
Government’s reform agenda
That is the purpose of the government’s reform agenda for pensions. To make the system as best it can be and to improve outcomes for pension savers.
Later in the year a new Pension Schemes Bill is expected to introduce a raft of measures that will radically reshape the market.
For defined contribution pensions, it will help prevent people from losing track of their pension pots.
The aim is that people will no longer be faced with multiple small pots when they have changed jobs and forgotten their pension – instead they find that the work to consolidate them has been done for them.
A new value for money framework will drive focus on the metrics that matter for pension savers: the investment returns and quality of services received, for the price paid.
The introduction of a new duty on trustees will mean that pension schemes must offer retirement products. This will result in people actually getting a pension and not just a savings pot when they stop work.
For defined benefit pensions, the Bill will also provide a statutory footing for a new kind of pension scheme, superfunds – which will provide greater security for pension scheme members in closed legacy schemes.
Many of you in this room will benefit from a public sector pension. The upcoming Bill will also impact you if you currently or have ever worked in local government.
The Local Government Pension Scheme in England and Wales is the seventh largest pension fund in the world.
It manages around £360 billion worth of assets thanks to the contributions of the 6.5 million people who work in our public sector to deliver our essential local services.
Here the government plans to accelerate the pooling of LGPS assets into eight 'mega-funds', each with an average of £50 billion in assets under management (AUM).
To strengthen the connection to local and regional investments to help support economic growth across the country.
And to introduce new governance arrangements to ensure better management and oversight.
Alongside the Bill, the Chancellor has undertaken a pensions review seeking to deliver better outcomes for pension savers and boost growth.
Taken together the reforms represent a seismic shake up of the pensions landscape.
And across all is a common theme – the search for scale.
Scale can help deliver value for money
As a regulator, for many years we have said that we want to see fewer, larger, well-run schemes that deliver for savers.
Scale has not been the goal in itself – making sure that every scheme provides value for money has been our driving force.
But in our experience scale does often brings benefits.
Not just in the cost efficiencies that economies of scale can provide – where international evidence shows clear evidence of lower costs as schemes scale up to managing more than £500 million of assets.
But also, governance, where across both DB and DC our surveys have consistently shown larger schemes have higher standards.
This is particularly true for investment governance.
I know that all of you in this room would expect those looking after yours, your friends and your colleagues’ retirement incomes would abide by the highest standards.
And whilst the vast majority of members are in schemes that are well run and well governed, this has not always been the case. For example, our latest research shows that only a quarter of small schemes dedicate time and resources to understand and mitigate climate risk and its likely impact on their portfolio of investments.
This is a concern especially when you consider that every single one of our authorised master trusts do have this in place.
All savers deserve to be in well-run, well governed, value for money pension schemes.
This is the purpose of our forthcoming value for money framework. This will mean schemes publicly disclose metrics that matter to good saver outcomes across investment performance, quality of services and cost.
Through this, trustees will be able to learn from others in the market to provide a better-quality offering.
But crucially, employers will also be able to pick schemes that are right for their employees – and as unions we’d hope and expect you to be an important voice of challenge to make sure that your colleagues are getting best in class performance.
But ahead of the framework we are also encouraging consolidation in savers’ interests where it is clear schemes cannot compete with the biggest and best schemes in the market.
The market is moving in that direction, and this year the number of DC schemes has decreased 15% to 920 – under 1,000 for the first time.
We are not prepared to sit by when pension savers risk being in poor value schemes. That is why we are running an ongoing regulatory initiative where we are proactively checking that savers in small DC schemes are really getting value.
So far, we’ve issued schemes with penalties and prompted nearly 1 in 5 of those contacted to wind up having concluded they can’t compete with the value offered by the biggest players in the market.
Second-best isn’t good enough for people’s retirements and this focus on value will continue in all that we do.
Trusteeship means always acting in members’ best interests
One of the foundational safeguards we have in the workplace pensions system to make sure this is the case is trusteeship.
Some of you in this room may be or have been a trustee. And if so I’m sure that you will know about the responsibility this brings.
The responsibility to represent people like you, workers past and present in the company in which you have built your career.
And a responsibility to guide the decisions that a pension scheme makes so that they are always in savers’ interests.
Diversity of thought matters and member nominated trustees, often supported by their union, bring much valued different perspectives to trustee boards.
That is why we have published guidance for governing bodies and employers, looking to improve the equality, diversity and inclusion of their pension scheme.
And for many years helped to educate trustees through our free to use trustee toolkit, and through our General Code, so that no-one is unclear of their obligations.
But in a world of scale, the nature of trusteeship is changing.
No longer is it a pensions system of small, independent pension schemes.
But a landscape increasingly dominated by 'mega schemes' and professional trustees.
This brings new risks and opportunities for savers and requires us as a regulator to shift our approach, and to make sure that in all of this change – trustees remain squarely focused on acting in members’ best interests.
Extending our reach to professional trustee firms
This is especially true in the newly dominant professional trustee market.
The professional trustee industry has experienced significant growth over the last few years, with more than half of UK schemes using a professional or sole trustee.
Between them, just 10 firms govern more than a trillion pounds of savers’ retirement income.
As part of our new risk-based and outcome-focused approach to regulation, we are extending our engagement with these firms to identify and mitigate any risks to pension savers.
We have spent the last six months taking a closer look at these firms.
Our goal has been to understand how they make sure the principles of good trusteeship run through everything that they do.
We have probed across five key areas: ownership structure, skills and experience, knowledge and understanding, diversity, equality and inclusion, conflicts of interests and fees.
Firms have been open in their engagement with us, as we would expect, given the role they play in governing thousands of schemes.
But this engagement has confirmed the need to not only check professional trustee firms provide capable trustees – which undoubtably they can do.
But also, to make sure they are operating in a way that is consistent with the needs of savers.
That is why today I can announce that from the summer we are extending our supervision to build formal relationships with the largest professional trustee firms.
We will learn from this pilot before extending the approach to the rest of the market by the end of the year.
Through this we will explore the nature of the relationship between the firm and the employer. To make sure that independence is maintained.
We will interrogate professional trustee firms’ profit and remuneration models. That means understanding if the commercial imperatives of firms could affect trustee’s decision making. And whether there is any risk that services could be compromised in a bid to reduce costs.
One of the benefits of professional trustee firms is that they can bring a range of advisory expertise and ancillary services. This is particularly attractive for small schemes looking for a one-stop-shop. But we want to explore if this brings risk too. For example, whether there is a reluctance from professional trustees to properly scrutinise advice from, or to pursue errors by, in-house advisers.
And most importantly of all, we want to know who the scheme decision-maker is – not the firm but the person - that these people have the right level of skills and experience and that they are guided entirely by their duties to act in the members’ best interests.
The role of member nominated trustees
Because that is the role of trusteeship. To represent people like you.
And it is why in this changing pensions landscape, we cannot afford to lose the unique perspectives that also member nominated trustees bring.
Trustees who have access to the right expertise, who implement the right processes standards, who access and base their decision-making on the best available quality data, aligned to member needs.
But it is also the culture and behaviour of trusteeship that matters.
That is why above all I always want to see in trustees:
The willingness to provide constructive challenge.
And at their core, a member outcome-focus.
We will seek to foster these traits and behaviours in trustees in different ways.
First, by continuing to provide timely and relevant guidance. Later in the spring this includes new guidance for trustees to help them understand the array of new models of service provision that are hitting the market – fiduciary management, governance services, and for DB schemes, end-game solutions.
Second, through compelling regulatory communications and supervisory engagements, helping trustees to understand what to prioritise and our clear expectations.
And third, by developing a new strategy over the course of the year seeking to raise standards of trusteeship.
Dashboards
In this changing pensions landscape, pensions are about to become increasingly visible to millions of workers.
Pensions dashboards will launch next year and present a transformational opportunity to connect people with their pensions.
In workplace pensions some 2,700 schemes covering 48 million records are in scope – and there are around £31 billion worth of lost pensions that could be found thanks to dashboards.
But dashboards will only work if people can trust the information that is put into them.
Our industry engagement programme has reached 90% of schemes, to make sure that they meet their deadlines and we are urging schemes to improve their data as well as undertake regular data reviews. Progress has been made, but one in four schemes still hold some form of dashboard data in a non-digital form.
That is why data is the focus of a new regulatory initiative, where we are reaching out to hundreds of schemes who may be failing our expectations. They must explain to us why they've not taken action to improve their data.
I hope that dashboards are just the start of the journey towards open data standards – and that with the support of our new digital, data and technology approach as outlined in our new strategy – we can help the industry harness the power of the data revolution to deliver even more for savers.
How unions help pension scheme members – new products and services
In a land of mega schemes, where value is the guiding principle, and where savers begin to be more aware of their pensions – new products and services will start to come to market.
And it is here that unions can also play an important role in working with employers to make sure that the pensions provision offered is right for you and your colleagues.
One interesting innovation is collective defined contribution (CDC) schemes. Following negotiation with the Communication Workers Union, in November, Royal Mail launched the first ever CDC scheme in the UK.
CDC schemes provide members with an income for life in retirement, rather than the pot of savings accrued in a DC scheme. Sounds like DB?
Well, almost, but instead of a guarantee there is a “target” pension – which can go up or down based on performance.
CDC’s work by putting contributions from the employer and employee in a collective fund. This helps to share risk across savers and for savers to remain invested in growth assets for longer resulting in much higher returns.
Learning from the Netherlands which has had types of CDC and industry wide schemes for many years, the Pensions Policy Institute models show that in the UK a hypothetical scheme with a 10% contribution rate could produce a replacement rate of between 27% and 30%, compared to 12% to 21% in a DC scheme.
At present, the legislation only allows for a single-employer model – but the government has committed to widening this to including multi-employer in the future.
But this new model will only come to market if there is a clear demand for it from savers, unions and employers. So, the ball is in your court.
Conclusion
I started this speech outlining that the story for workplace pensions in Britain is only half written.
That we have a generation of people now saving for retirement, but that many are likely not saving enough.
That the system is about to undergo radical change towards fewer larger pension schemes – which could deliver the value for money that savers desperately need.
But in that change, we must keep the best parts of the old system – ensuring trustees act in savers best interests - and build on it in the new system, with greater expertise and regulatory oversight.
Pensions in the last decade has been a fantastic success story.
But it is unfinished business.
Help us make sure that the next chapter delivers in savers’ interests.
Thank you.
