Work and Pensions Committee
Oral evidence: Defined benefit pension schemes, HC 144
Wednesday 29 November 2023
Ordered by the House of Commons to be published on 29 November 2023.
Members present: Sir Stephen Timms (Chair); Debbie Abrahams; Siobhan Baillie; David Linden; Steve McCabe; Nigel Mills; Selaine Saxby; Sir Desmond Swayne.
Questions 214 - 290
Witnesses
I: Nausicaa Delfas, Chief Executive, The Pensions Regulator; Louise Davey, Interim Director of Regulatory Policy, Analysis and Advice, The Pensions Regulator; and Neil Bull, Head of Investment, The Pensions Regulator.
Written evidence from witnesses:
The Pensions Regulator (DBP0071)
Witnesses: Nausicaa Delfas, Louise Davey and Neil Bull.
Q214 Chair: Welcome, everybody, to this meeting of the Work and Pensions Select Committee for our inquiry on defined benefit pension schemes. A very warm welcome to the members of our panel this morning. Can I ask you each to tell us who you are?
Louise Davey: Good morning. I am the interim director for regulatory policy, analysis and advice at The Pensions Regulator. I head up the teams responsible for developing regulatory policy and the professional advice teams, including legal, actuarial and investment consultancy.
Nausicaa Delfas: Hello. I am the chief executive of The Pensions Regulator, which is the regulator for workplace pensions.
Neil Bull: Good morning. I head up the investment team here at The Pensions Regulator.
Q215 Chair: Thank you. Can I put the first question to you, Nausicaa? After the LDI debacle of last year, the Prudential Regulation Authority said that you should take account of financial stability considerations in the work that you do. What additional resources do you think you need to do that? Given your background at the FCA, with its rather greater powers in a number of respects, do you think that TPR needs greater powers as well for that task or for other tasks that you are undertaking?
Nausicaa Delfas: I would quite like to set the scene and then answer your question. Over the last six months, since I was appointed in April, I have been speaking to stakeholders and staff and I have been thinking about the role of The Pensions Regulator and how it might need to evolve in light of changes, including the LDI incident last year. What is very clear to me is that the pensions landscape is changing. With the success of automatic enrolment, most people are now in defined contribution schemes. Schemes are consolidating. There are technological advances. We are very committed to moving towards a landscape of fewer, larger, well-run schemes that deliver good outcomes for savers and are able to invest in diverse assets, have greater efficiency in administration, and so forth.
One of the things that I have been talking about is my vision for The Pensions Regulator, which is also relevant to the financial stability point. I think that The Pensions Regulator is here for three key reasons. One is to protect savers’ money and make sure that employers and schemes comply with their duties. Secondly, it is to help to enhance the pension system with effective market oversight and controls. Thirdly, it is to support innovation in the interests of savers.
Looking at the financial stability question that you asked, the market oversight requirement from my perspective for TPR is key here. This is a shift for TPR moving from being quite compliance-focused to taking a broader view of the market. Indeed, in DWP’s recent report back to you on LDI, it said that TPR should incorporate financial stability considerations in its decision making and balance them with its objectives as a pensions regulator. This is what we are doing. Since last year and since I joined, I have been working with the team to make sure that we have the right resources and that we have the right data. One of the other changes that I think is fundamental to TPR is moving to be more data and digitally enabled. That is key.
We have been working with the Bank of England and the FCA. It is very important to work with our regulatory partners to have the right data to cover oversight of schemes’ liquidity, resilience and governance. We have put these frameworks in place and have ensured that we have the right capabilities in TPR and that we are supplementing and boosting those capabilities. We have been increasing our investment team and we will also be looking at appointing some more resource to bring that external insight into TPR.
In answer to your question, we are focused on this issue. We have done a lot of work to address it and we have built up our resources to address it as well.
Q216 Chair: You are reasonably confident that you now have the resources to take on that additional brief, is that right?
Nausicaa Delfas: Yes, that is right. We have the resources. We are also hiring some further external capability, either through a panel or some supplementary macroeconomist resource. We have identified that.
You did also ask about powers, and I am happy to talk about powers as well.
Q217 Chair: Yes. I would be interested to know whether, in the time that you have been there, you have come up with thoughts about additional powers that you might need.
Nausicaa Delfas: Yes. You mentioned also the comparison with the FCA. When I joined TPR I found many similarities in the sense of wanting to become more digitally and data-enabled and working with regulatory partners and the industry to achieve our outcomes.
I did notice on the powers side that the powers at TPR are relatively more constrained and specific—specific around particular types of schemes. There are some restrictions around the information and data we can gather, and this was also picked up in the public bodies review that Mary Starks conducted. That aspect is very important to us because we want to become data and digitally enabled, so we need to have the flexibility to be able to ask for the information we need. That is an area of focus for us, and we will be discussing this further with DWP and so forth as we go. I think there is some scope for TPR’s powers to be evolved to make it more flexible.
Chair: Thank you very much.
Q218 David Linden: Good morning. The Pension Protection Fund now has £12 billion in reserves. Indeed, I think it was Lesley Titcomb, the former CEO of The Pensions Regulator, who said that the success of the PPF funding strategy and improvements in the scheme funding had led to a "risk that the PPF may find itself with more money than it ultimately needs in future." Is it, therefore, time to remove the regulator's statutory objective to protect the PPF?
Nausicaa Delfas: Thank you for that question. I should start, first of all, by saying that from The Pensions Regulator perspective, whether we have that objective or not our focus is on protecting savers' interests. We work hard to ensure those interests, and in most cases savers' best interests are in continuing in a well-funded scheme with a strong employer covenant.
However, the PPF is there for good reason because there are instances of insolvency. It is also important to support our moral hazard powers that that objective is there. It was created and our objective was put in to make sure that unscrupulous employers did not leave their pension schemes. We do have powers to claw back contribution notices and so forth.
In my view, the objective is helpful but, regardless of it, our focus is on protecting savers’ interests.
Q219 David Linden: Would you support an objective to promote good quality future service benefits and, if so, what would that look like in practice?
Nausicaa Delfas: We have been looking carefully at this issue and I don’t think it is necessary for an objective on future accrual because our revised DB funding code provides for future accrual as well. This means that it allows schemes to account for future accrual with longer journey plans and the ability to hold risk for longer. We think that it is not necessary to have another objective on that. We are integrating it into our regulatory approach.
Q220 Nigel Mills: It almost looks like you have taken over the organisation at the easiest possible time, doesn’t it? Nearly every defined benefit scheme is now so flush with funds that all the problems your predecessors have wrestled with for 20 years have all gone away, haven’t they? Isn’t it time to celebrate a job well done and move on to something else for us all now?
Nausicaa Delfas: I am happy to bring in my colleagues, who are very much over the funds and our DB code. You are right that DB pension schemes are very well funded. We think that over 80% are in surplus and this is the strongest position that there has been for the past 15 years.
However, as I have explained, there are a number of challenges. First, that position can change. We know from experience that that could happen. DB schemes are not the only area that The Pensions Regulator regulates, and we have quite a number of challenges on the defined contribution side as well to make sure that we enhance the system to make it as effective as possible for DC savers, on whose shoulders rests the risk of their retirement.
On the defined benefit side, we are putting in place a new DB funding code, which will allow clarity on how DB schemes can operate going forward. I am happy to talk about that further if you are interested.
Q221 Nigel Mills: I am sure we will get to that. It is just a fact, isn't it? We see from the news nearly every day a more schemes that are rushing for the exit door and have gotten themselves bought out, bought in or whatever. Is that a good thing? Is that what we expect to see? Are we going to see a rush in the next couple of years for as many schemes to get off the rollercoaster as they can in case it dips down again at some point or something?
Nausicaa Delfas: You are right, but buy-out is not the only option for schemes. As I explained in my introduction, we are very supportive of consolidation in schemes. Across both the DB and the DC landscape, we believe that consolidation is important and that larger, well-run schemes deliver better outcomes for savers. Therefore, there are a number of alternatives to buy-out, including superfunds. We have been pleased to see that the first superfund has transacted recently—Clara with Sears—and there are other initiatives as well. There is a landscape there building up for consolidation on the defined benefit side as well as the defined contribution side.
Q222 Nigel Mills: Do you think that the current actuarial position is real and stable and that effectively for a lot of schemes now everything is fine? Or do you think there is some risk that this might go wrong again and if interest rates do something whacky, up or down, this position might reverse and that probably the best thing to do while schemes have got themselves in that position is to get the buy-out done now and not risk that in future? Or is it safe just to keep the scheme running on and pay out the pensions that they were originally there to do?
Nausicaa Delfas: On your last point about whether they should run on or buy out, that is a question for the trustees and the employers. Of course, with defined benefit schemes the employers are on the hook for the liability of the pension scheme. It is for the employers and the trustees to decide with the scheme rules whether they think it is appropriate to run on or to buy out or buy in.
On your question as to whether it is real, I will bring in my colleague Neil Bull on the funding position if that is what you were after.
Neil Bull: I will try my best to answer that. I think it is a good challenge to say that although pension schemes are in a good position now—and just to give you one number, the funding position at the end of September 2023 from our numbers is a surplus of £295 billion, so echoing the comments made that that is a good funding position.
However, part of our job is to look at the situations that might challenge that funding. In fact, that is a reason why many pension schemes over time have increased their allocation to bonds. They do that because the payments that are received from bonds mirror the payments out in pensions in payment. Providing that protection of matching assets with liabilities creates an all-weather situation so that if bond yields go up or if bond yields go down, then the funding position is broadly protected.
That leads on, I guess, to some of the discussions about LDI and hedging, which I know the Committee has looked at in depth in the past. The main objective with hedging is to protect your funding position from a change in interest rates and bond yields. Many schemes do that and obviously if bond yields fall you would expect to see those liabilities go up in value. You want to get to a position where your assets also go up in value. Recently, we have seen the opposite of that. The whole aim of the approach to hedging is to protect the funding position of pension schemes.
Q223 Nigel Mills: We will wander back around old debates, but the risk to pension schemes is inflation pushing up their future outgoings, not interest rates, isn’t it? What you are really trying to hedge is inflation, not interest rates, and an accounting proxy gets you that outcome, doesn’t it? I guess if you can get index-linked gilts, then you have hedged your inflation. That is a slightly different assumption, isn’t it?
Neil Bull: Yes. In terms of how this works in practice—prior to this job I worked for a multinational looking at LDI programmes—generally there are two things that people look to hedge. One is the nominal exposure with the movement of bond yields as it relates to fixed payments and then, to your point, the real exposure, the change of real bond yields. You can think of that as the nominal and the inflation side. It is both pieces you want to be able to protect against, and that is what a good hedging programme should do.
Q224 Nigel Mills: Finally, Nausicaa, is it not slightly mischievous just to say that this is up to trustees? We have had years of the regulator tightening the screw on trustee discretion. We hear from lots of trustees who feel a bit constrained. Is it really up to them to decide on buy-out or are they effectively being pressured to say, “The only real way to secure the benefits long term is to do buy-out, and that is what we tell you that you have to do. Therefore, we are almost telling you that you have to do buy-out but we are using three sentences rather than one”?
Nausicaa Delfas: I can bring in Louise Davey here on trustees and the funding code but, as I explained, regarding the position here on decisions about members’ interests, the trustees have a fiduciary duty to consider members’ interests. The purpose of the pension scheme is to pay promised benefits to people when they retire and that is their primary concern. There is a question also of the employer’s role, who is on the hook. Louise, do you want to come in on the trustees?
Louise Davey: Yes. I would say that the objective for the trustees is to ensure that the benefits that are provided under the rules of the scheme are paid out when they fall due. Buy-out over time is one of the options that trustees can take in order to secure that over the long term, but it is not the only option. TPR does not instruct trustees to buy out. We are very clear that there are a range of options, including more recently using consolidators such as superfunds, but running the scheme on is also a perfectly valid option. We are very supportive of that where there is an employer covenant that has the strength to support the investment strategies that the trustees choose to take. There is a range of options there.
There has always been a good deal of flexibility in the scheme funding system. We are making changes now and the changes that we intend to bring in with the new regulations and the DB funding code are intended to embed a lot of the good practice that we have already seen trustees exercising, but equally to protect abuse of the flexibilities in the system. When the Pension Schemes Act 2021 was introduced, one of the drivers for it that the Government set out in their White Paper was that there were ambiguities and lack of clarity around some of the key principles as to what constitutes an appropriate recovery plan or prudent technical provisions, which are the areas that are set out in legislation. What our code intends to do is to provide a lot more clarity in those areas, which will allow trustees to plan for the longer term much more effectively and make it very clear what strategies will be available to them, depending on the strength of the employer covenant that underlies it.
Q225 Nigel Mills: Are you not tempted, though, for schemes that could nearly afford a buy-out but are not quite there, to say that the best thing the trustees could do is go to the sponsor and say, “Just tip a few quid in and you can get to buy-out and it is all secure”? This might be a once-in-a-generation chance to do that for a relatively small amount. Does it not feel that that might be the right thing for a lot of trustees to do in this situation?
Louise Davey: It could well be the right thing for trustees to do in their situation, but the key is that it is a decision for the trustee and that will also be in consultation with the employer. As Nausicaa said, the employer is ultimately on the hook for the pension liabilities so that may be the decision that is reached. However, it is not the only option that is available. We are seeing now other options coming to the market, such as superfunds and capital-backed journey plans, which provide a range of options that can be taken that would also help to secure those benefits in the longer term.
Q226 Nigel Mills: Should all trustees be looking at this? Would a competent trustee be looking at all these options quite seriously at the moment?
Louise Davey: We would say that trustees would be looking at these options at the moment, yes.
Q227 Sir Desmond Swayne: The Pension Protection Fund has made a very different assessment of asset values. Who is right and why does it matter?
Nausicaa Delfas: I will bring in Neil here.
Neil Bull: Thank you for the question. I am not sure if your question was about the Pension Protection Fund or the ONS, but I will cover both in my answer.
Sir Desmond Swayne: Sorry, yes.
Neil Bull: We have very similar numbers to the PPF. Let’s deal with that one first. That is not surprising because they come from the same source of data ultimately, from the data of scheme return that we share with them.
Where there is a difference is the ONS numbers. Let me just explain why there is a difference there. First of all, they are used for different purposes. The ONS uses a sample of schemes, around 10% to 15%. It tends to focus on the larger schemes, and it will look at the funding levels and the level of assets over recent periods. It will then use that data to effectively scale for the smaller pension schemes. It does not hold the data on the smaller pension schemes. We hold the data on all the pension schemes. That is why our numbers differ.
For the purposes of this Committee as it relates to funding and things like that, we are very comfortable with the number that I quoted earlier in terms of the assets and liabilities and the surplus position.
Q228 Sir Desmond Swayne: Do you take the view that it does not matter if asset values have fallen if the liabilities have fallen by, let’s say, a greater amount?
Neil Bull: I think that for most trustees, certainly having worked in pensions for 20 years, the number that folk zoom in on whenever they look at the position is the funding level. A fall in assets would be concerning if it was not associated with a fall in liabilities, but we have seen in 2022 both, for example, happening at the same time. That is not an accident. It is designed in the way I was talking about earlier, to try to hedge the level of surplus or deficit as it was.
The gap between assets and liabilities is the most important part. If we saw bond yields go back down again, which may or may not happen, you would expect to see liabilities go back up again. However, if you have done a good job of hedging you would expect the assets to move up again as well and the gap to be relatively stable.
Q229 Sir Desmond Swayne: How many schemes have seen a deterioration in their funding level? In your estimate, are they up for the challenge of improving that position?
Neil Bull: Very few schemes have seen a deterioration in their funding level. If I quote a number based on buy-out—and the only reason I use the buy-out number is that it is an apples-to-apples comparison across all the different schemes—we think that less than 5% of schemes would have seen a deterioration in their funding level, so 95% of schemes seeing an improvement in their funding level over this period.
Q230 Chair: Neil, can I just pick you up on that? That 5%, will those be the ones who, because of the particular position that they were in, were caught out by the LDI problems? Are those the ones?
Neil Bull: No, not necessarily. It could be for a whole host of reasons. It is often because of the other assets that they might be holding. It is very tempting to think of pension schemes as similar for the purposes of looking at this exercise, but there will be some pension schemes that held particular types of assets that did not do particularly well outside of the LDI arena. It might be as much to do with that as to do with any problems with the actual period in September 2022, which I think was perhaps where your question was.
Q231 Sir Desmond Swayne: Is there a tension in the aspirations of the Chancellor’s Mansion House speech and the funding code? How will you change the code to eschew risk aversion or is lower risk aversion only for the well-funded schemes?
Nausicaa Delfas: If I could just come in here, we have revised our DB funding code. I will bring my colleague Louise Davey in here. We very much believe that it is entirely consistent with the Government’s Mansion House reforms because it allows for pension schemes to invest in diverse assets. The level of risk that they can take depends on the strength of their employer covenants and the level of their maturity. If they are significantly mature, it is different to when they are quite immature or open. I will bring in Louise who can tell you a bit more about this.
Louise Davey: We are aware through the various consultation processes that we have been through on the DWP’s regulations and our draft code of practice that there are some perceptions that this will introduce further risk aversion. However, that is not the policy intention. We have heard the responses to the consultation and equally evidence that you in this Committee have also heard, and we are confident that the final version of the regulations and code will make clear that flexibility.
The objective is not to remove all risk from the DB system and we are very clear that there are a good number of schemes that have the capacity to take on a significant amount of risk in their investment strategy if that is what they chose to do because they are immature, because they are open to new members and future accrual and because they have a strong employer covenant that can support the scheme should the investment returns not play out as hoped. That is the key.
Even with mature schemes, there is still significant scope for them to be investing in growth assets, and that is also made clear in the code of practice. We do not accept that the Mansion House reforms and the DB funding code are inconsistent.
Q232 Sir Desmond Swayne: Those schemes that resisted the encouragement of the regulator to use LDI thrived. Does that have any implications for confidence in the code? When are you going to publish the code?
Louise Davey: I can answer the latter question and then perhaps Neil might want to come in on the first part.
The timeline that is anticipated at the moment is that regulations will be introduced in the new year and will be in force by April 2024. They will be effective for schemes that have valuations from autumn 2024. Our code of practice will come in on the appropriate timeline to also be in force for those dates.
Sir Desmond Swayne: And the answer to my question on the confidence—
Neil Bull: Yes. First of all, let’s deal with the facts. You are right that for schemes that did not use liability hedging when bond yields went up their assets would not have fallen as much as ones that did use that. Again, the reason LDI is used is not to take a view on interest rates, whether up or down; it is to protect. It is a risk-management tool, effectively, to protect the level of deficit or surplus over time.
Just to finish that piece, over that period you are right, but what about if bond yields were to fall? They may or may not do that. A scheme that does not hedge would be very much at risk and potentially give up all that and a lot more in deficit. Many trustees take the view that they want to protect the volatility of the surplus and that is why they use LDI. I hope that helps to answer your question.
Q233 Chair: Thank you very much. Can I pick up this point about whether you are promoting inappropriate risk aversion? We know the Universities Superannuation Scheme took advice on what a reasonable time horizon for the employer covenant should be, and I think the advice it got was that it should be 30 years. You wrote back to them and said you were prepared to live with that for the 2023 valuation but in the longer term you thought a covenant horizon of 20 years would be more appropriate. USS is worried that that would force it to de-risk unnecessarily. Why are you unhappy with the conclusion of the advice that it obtained that 30 years was the right time?
Louise Davey: The point is that where long-term planning is taking place it is reasonable to say that you cannot see forever into the future and there need to be assumptions made about how long the scheme might stay open and so on. In reality, if that scheme does stay open and if it does not mature, then there should be no actual impact on the de-risking that would need to take place. Because if rolling valuations are done and that position is updated every three years, then that view can remain very long-term. There needs to be realistic long-term planning done there. That will be looked at case by case so I cannot comment in detail on a specific case. In actual fact, if the maturing of a scheme is not happening in practice, then there will be no need for a scheme to de-risk over that time horizon.
Q234 Chair: I am not sure, then, why you have told it that 20 years would be the right horizon. USS is a good example, I think, of a scheme that we would all expect to be going for many decades to come, so I am wondering why you wanted it to adopt a shorter term.
Louise Davey: I don’t think that we can comment on a particular case conversation that we were having. Neil, I don’t know if you have anything more to add on the principles of that to clarify.
Neil Bull: Yes, just on the principles, rather than the specifics, perhaps.
Chair: Perhaps you could drop us a line on the specifics about why that view was taken. There are concerns, as you know, about inappropriate risk aversion being applied. Thank you. Let’s move on then to Steve McCabe.
Q235 Steve McCabe: Good morning. The Bank of England has suggested that there are some risks from too rapid an expansion in the buy-out market. Do you agree and what discussions have you had with the Bank about it?
Nausicaa Delfas: We work very closely with the Prudential Regulation Authority and the Bank of England on this issue, and I can bring Louise in. It is part of our financial stability work that we have been doing. We conduct modelling and oversight of pension schemes that might be going towards buy-out so that we can help the PRA in its risk assessment as it is responsible for insurance companies. Louise, do you want to add to that?
Louise Davey: Yes. As part of the financial stability work, one of the pieces of work we are doing is modelling what the trajectory of pension schemes might look like and how many might be looking to target buy-out and over what time horizon. That can feed into the PRA’s own modelling and help it to manage that risk.
Steve McCabe: Does that mean you do agree with the Bank of England that there is a potential risk?
Louise Davey: Well, we know—
Steve McCabe: I am just trying to understand. The Bank of England suggests there is a risk and the first question I asked was: do you agree? Do you?
Nausicaa Delfas: We think that there could be a risk—
Steve McCabe: There could be.
Nausicaa Delfas: So that is why we model. As Louise explained, we oversee pension schemes, but it is the PRA that regulates insurance companies. Together we are looking at how to mitigate that possible risk. That is how we are operating.
As we said earlier, and I don’t know if this helps here as well, buy-out is not the only option. We are seeing schemes coming to us on a variety of issues, which we touched on earlier, some running on, some exploring capital-backed journey plans, and some exploring superfunds. It is good that there is a diverse market building for consolidation in DB schemes.
Q236 Steve McCabe: That is good. What do you think about the argument that there is a risk from increased herding in investments as a result of the DB funding code?
Nausicaa Delfas: Sorry, I did not quite catch that, an increased—
Steve McCabe: I will repeat it; that is okay. I was asking what you make of the argument that there is an increased risk of herding in investments as a result of the DB funding code.
Nausicaa Delfas: Thank you. As we explained, we are looking forward to publishing our new DB funding code, which we have been working on in consultation with the industry. We are certain that this would not create herding because it allows great flexibility for schemes to choose their investment options, their journey path, and their risk management, based on their situation. We hope that this will be clear to the industry.
Neil Bull: Perhaps I could add a couple of numbers that might help the Committee on that one.
It is probably worth remembering where pension schemes are at the moment. They already have quite a lot of their investments in bonds. That is around 72% of their assets in bonds already, before the impact of any code. For many pension schemes, they will be quite comfortable where they are from an asset allocation point of view. Others may even decide to take more risk, and some will take less risk. I do not think this is a case of a code coming in and suddenly a lot of people moving from equities to bonds. As Nausicaa said, even for schemes that are mature there is quite a lot of flexibility. They will not have to invest their entire amount in bonds. They will still be able to maintain some growth assets. Some of them may be the more traditional ones and some of them might be the productive finance newer ones that were talked about in the Mansion House.
Q237 Steve McCabe: There is obviously some risk. You are working to try to offset that. Is that what these protocols you are setting up with the Bank of England are about?
Nausicaa Delfas: The protocols with the Bank of England are to ensure that we have in place a clear framework on how we are sharing information and how we work together. It really formalises how we are operating at the moment.
Q238 Steve McCabe: I am pursuing this because you are painting quite a rosy picture and things do look pretty good at the moment, as my colleague was suggesting earlier. However, the criticism after the LDI position was that TPR was a bit disconnected from the rest of the financial system. I think that the Government said that they wanted you to be more connected within the financial stability ecosystem.
Nausicaa Delfas: Certainly, since I joined in April, we have made great strides to improve the connection between TPR and the rest of the financial services ecosystem: the Bank of England, the FCA, schemes themselves and, indeed, areas of the ecosystem that we do not directly regulate, such as administrators and so forth. We are definitely in that arena.
Q239 Steve McCabe: So I should not lose any sleep over the risk to the buy-out market or herding in investments? I can sleep safe tonight, can I?
Nausicaa Delfas: As we have discussed, these are areas that everybody is conscious of, and we seek to mitigate those risks through the work that we do.
Q240 Siobhan Baillie: You were talking about the fact that there is a diverse market building, and Louise was talking about trustees having a range of options. We also know that the ABI was saying that about 75% of DB schemes are targeting insurer buy-out and about 40% of those are expecting to fully insure in the next five years. It is quite understandable that people are now looking at whether there should be incentivisation for run-on for mature schemes. We were looking at Lane Clark & Peacock. It has proposed making it easier to extract a surplus and the introduction of a higher levy and return to 100% PPF compensation. Do you know if there has been a proper assessment of whether that will encourage and be effective in increasing investment in UK finance?
Nausicaa Delfas: Thank you for that question. Clearly, there is a lot of discussion at the moment about DB schemes and whether they should run on, and LCP has put forward this proposal. As I said earlier, from our perspective, our priority is to protect savers’ interests and that is the prime focus for trustees as well. On this specific issue, we welcome the consultation that the Government announced in the autumn statement. I do agree with you that this is something that has to be carefully considered as to whether it will increase investment, what risks there could be to savers, and so forth. We are very supportive of the consultation on this issue.
Q241 Siobhan Baillie: Yes. DWP was saying that the incentives for an employer to invest its surplus are currently weak, so we were not surprised to see the consultation. Oliver Morley described the LCP proposals as a complicated sledgehammer to crack a nut. Do you agree with that? Are there other proposals flying around at the moment?
Nausicaa Delfas: If we look at the root, perhaps, of this proposal, it is the consideration of how pension assets could be invested in productive finance and in the UK economy. There is quite a broad discussion on that, and certainly our view across the pensions landscape is that we support a move towards fewer, larger, well-run schemes that have the capability, expertise and assets to invest in diverse assets, including productive finance.
From our perspective at TPR, looking across the piece, the longest time horizon is around defined contribution rather than DB. Only 9% of DB schemes are now open or open to further accrual, so defined contribution schemes have a much longer time horizon to invest in diverse assets.[1] The automatic enrolment rules are shortly going to change so that 18-year-olds and people on lower incomes will also be automatically enrolled. Therefore, it is incumbent on us to make sure that the pension system works as well as it can so that they can have the best possible retirement outcome when they come to retire.
In answer to your question, there are lots of considerations around. We do support fewer, larger, well-run schemes to invest in diverse assets and that is our core focus going forward.
Q242 Siobhan Baillie: Is this going to move quickly enough if we have so many targeting the insurer buy-out and 40% heading that way? What is the timeline for what the Government are doing and settling on ideas?
Nausicaa Delfas: As we mentioned earlier, buy-out is not the only option. Some schemes may choose or be able to buy out or buy in, or there are other options such as superfunds, or capital-backed journey plans or other types of consolidation. These things do take time, you are quite right, but there are different options for schemes.
Louise Davey: It is important to note that being at a level of funding that means that you could in theory buy out is not the only consideration. The scheme itself has to be in a shape that is ready for buy-out. That includes having all the right data in place. It includes making sure that all the paperwork for the company is tied up and in the right place to hand over. It also means, for insurers, having the right mix of assets that an insurer would be prepared to take on. Buy-out is not something that necessarily happens very quickly, but we are very supportive of broader options being looked at through the legislative lens. There is obviously the legislative timetable attached to that, but equally the buy-out does not happen overnight either.
Siobhan Baillie: You have just dealt with my other question. Thank you, Louise.
Q243 Selaine Saxby: Good morning. We heard from BP Pensioner Group that although the scheme was in surplus the employer had refused a request from the trustees for discretionary pension increases. The Hewlett Packard Pension Association said that its members have had just two discretionary increases in 13 years. How representative are these experiences?
Louise Davey: I can answer this one. With the distribution of surplus, including payment of discretionary increases, that is largely dictated by what is set out in the individual schemes' trust deed and rules, which can look different for different schemes. The decision could be solely for the trustees to make or it could be in consultation with the employer. In some cases, it is solely an employer's decision as to how that surplus might be distributed. It does depend on the scheme.
We do not routinely see cases coming to us where there are disputes about the distribution of surplus. Typically, that is a role for the pensions ombudsman to deal with individual scheme disputes. There is a procedure there. The scheme will have its internal dispute resolution procedure and if it is not resolved through that, then it will go to the pensions ombudsman to make a final decision. Where TPR would get involved was if there was evidence of systemic governance issues within a pension scheme that we could then examine at that level, but where there are individual member disputes, then that is not something that TPR would typically be involved with.
Q244 Selaine Saxby: Thank you. Do you know how many schemes have discretion in their rules regarding pre-1997 increases?
Louise Davey: I don’t believe we have that data, no. It depends. We do not see the individual scheme rules.
Q245 Selaine Saxby: Would you support research to understand that area and how this discretion is operated?
Nausicaa Delfas: This discretion is a matter for the trustees and the scheme design rather than a regulatory issue. This does depend on how the schemes have been set up and what the rules of the scheme are for the trustees and employers.
Louise Davey: As part of the wider discussion about how surpluses could be used, then there could be merit in exploring whether there could be more standardisation around that. I guess the fact that they are referred to as discretionary increases means that the nature of them is that it is at the discretion of whatever is set out in the scheme rules as to who can make that call.
Q246 Selaine Saxby: Do you as TPR have powers to improve collaboration between trustees, sponsoring employers and scheme members on these issues; for example, perhaps strengthening the position of member-nominated trustees or the requirement to consult scheme members?
Louise Davey: We think that member-nominated trustees and lay trustees generally have an important contribution to make on trustee boards, including bringing further diversity into the discussions that are had. We do, however, also support a move towards more professionalisation of trusteeship, but we think that there still needs to be a role retained there for the members’ voice to be heard. We see lots of examples of member consultative panels, for example, being used by professional trustee boards and we think that is something that we would certainly want to see retained. Equally, having member-nominated trustees as part of the board itself can certainly add value by bringing the members’ voice, but it is important that the role of the trustee board as a whole is to have the members’ interests at heart. When trustees are making decisions, and in some cases where they are exercising their discretion, they have to think about the totality of the membership, not just particular cohorts of members.
Q247 Selaine Saxby: Do you think there is a need for a change in legislation that would help in this area? The Hewlett Packard Pension Association has suggested the introduction of an ethical code of practice. I do not know if we would need legislation for that, but do you think that there is change needed?
Louise Davey: The trustees’ fiduciary duty encapsulates all that, so no, we don’t think that there is a need for any additional code of ethical practice to support that. It is an area where guidance can be provided but it is all down to the trust deed and rules and how that discretion is exercised within that framework. We would not be able to issue, nor would anyone else be able to issue, a code of practice or anything that gave a universal approach to how those things should be done because it is dependent on the individual scheme structures.
Q248 David Linden: Let’s turn to trustee knowledge and understanding. How do you plan to use the trustee register?
Nausicaa Delfas: Louise will be leading on that so I will bring her in, but we think that the trustee register is important. We welcome the Government’s support for us moving forward with that because it is an important step to ensure that trustees who are responsible for the retirement income of millions are meeting stringent standards. I will bring Louise in here.
Louise Davey: The benefit of introducing a trustee register is that it will give us clear oversight of every person who is acting as a trustee for occupational pension schemes. At the moment, we do get data scheme by scheme about who is acting as a trustee. The data that we are permitted to collect in that space is very limited at the moment, so the introduction of a register will give us the ability to gather more information, including the level of qualification, experience and many other factors. It will give us that oversight as a whole so that we will be able to engage at the trustee level rather than scheme by scheme.
Q249 David Linden: I guess my question would be: what is the point of a register if the requirements of the trustees are not particularly rigorously enforced? For example, I think that TPR’s 2022 defined benefit survey showed that nearly a fifth of trustees had never used or were aware of TPR’s codes of practice. There are things like online toolkits, but do we need to show a bit more teeth to ensure that trustees, as well as just being on a register, are using this stuff?
Louise Davey: The research that you are quoting there goes to one of the key reasons why we think that consolidation is a good thing for members. The examples there we typically see very much at the smaller end of the market where those poorer standards are observed. That is the end of the market that is much harder to engage with. There are a lot of schemes there. They represent a relatively small proportion of memberships as a whole, but there are a lot of schemes there.
With the introduction of the trustee register, we are able to see who the individuals are, how they are qualified, and what schemes they are attached to. It can help us to drive that consolidation as well so that we have more savers who are in larger, well-run schemes.
Q250 David Linden: Should we have regular reports on whether trustees have completed your trustee toolkit?
Louise Davey: We do have similar requirements for the larger schemes that we authorise and supervise. For master trusts, for example, we have much greater oversight around the level of qualification, and as we see a more consolidated market we would expect to be able to introduce more things like that, so that we have better oversight of how the schemes that are there are being governed.
Q251 David Linden: The Government have decided not to mandate accreditation, which we heard had support from the associations for member-nominated and professional trusts. I guess a question would be: how can a voluntary approach be made more effective and at which point should that be reviewed?
Louise Davey: We are very supportive of trustee accreditation. We worked very closely with the Association of Professional Pension Trustees in developing the standards that are attached to accreditation. It is something that we strongly support. We do not have a commitment for legislation in that space. Nevertheless, the work that we do will continue to place a very high emphasis on accreditation. We will continue to work more with the accrediting bodies to make sure that the accreditation is of the right standard and to promote it much more strongly. It is something that in our discussions with schemes we would expect to see, and we would certainly expect where a professional trustee is appointed for that professional trustee to be accredited.
Q252 David Linden: We had evidence from the Association of Member Nominated Trustees. I will quote from that evidence: “Too many lay trustees are not given enough time away from their day jobs to fulfil their trustee duties, including training and preparation for trustee board and subcommittee meetings”. Is that a view that you would agree with?
Louise Davey: We have also heard that. Lay trustees, as I said, do have an important role to play and by law, employers do need to allow reasonable time off from day-to-day duties for people to carry out their trustee duties. That is in the Employment Rights Act, I believe.
Our perspective on that is we think that means more than just rearranging workload. We think that means reducing workload to allow proper time to be spent on trustee duties. This is something that we have set out in our guidance that is aimed at employers on equality, diversity and inclusion, which we published earlier this year.
Q253 David Linden: Finally, on the provision of time for trustees of these smaller funds—I think from what you have been saying it is the smaller funds that are slightly more problematic—your view is that there is enough legal provision there to give trustees the time to go and do this, so would I be right in thinking that the problem is not necessarily the legislation, the problem is the employers?
Louise Davey: We have not done extensive research into what the underlying issues are, but certainly there is a requirement for employers to permit reasonable time off for trustee duties to be carried out.
David Linden: That is very helpful. Thanks, Ms Davey.
Q254 Siobhan Baillie: Very quickly, just thinking about members and to help trustees, do you think that requirements to consult scheme members should be strengthened, particularly in surplus territory and buy-out? Do you think that is something that could assist all round?
Nausicaa Delfas: As Louise said, there are requirements to have member-nominated trustees on boards and they are really the voice of the members. They should be taking that into account in exercising their fiduciary duty. It is an interesting question whether there should be a specific requirement, yes.
Siobhan Baillie: There is a formal consultation on—
Louise Davey: There are existing requirements for employee consultation in some specific circumstances to do with the closure of a scheme, for example, and if there is anything being done that might affect accrued benefits. Yes, there could potentially be broader support for that. I suppose the key is that trustees are there to represent the members so there is a question around how trustees communicate with members and get their ongoing views on various issues that could also be brought into that.
Q255 Debbie Abrahams: Good morning, everyone. I want to ask some questions about sole trustees. I understand that over the last year there has been a 12% increase in sole trustees. I wondered if you were able to do some horizon scanning to see how this might increase or not over the next five years.
Nausicaa Delfas: It is a good question because around sole trustees there are, of course, various pros and risks. This is an area that we are interested in. Our top priorities at TPR are consolidation, trusteeship and innovation, so around trusteeship, this is an area that we will be looking at carefully. We will be considering the trajectory of sole trustees but also how we can help. There are many benefits to sole trustees in terms of expertise, professionalism and so forth, but, of course, there are also risks around lack of—
Q256 Debbie Abrahams: Let's come on to that because it is one of my questions. You are saying you will be looking at it, but you do not have any projections at the moment.
Louise Davey: We see that it is an increasing trend. We have not done any analysis of how far that might continue because our focus is on the consolidation of the market. We would look to see fewer schemes. Given that sole trusteeship in many cases is often at the smaller end, we would expect to see fewer of those schemes.
Q257 Debbie Abrahams: I just want to confirm that. It is at the small scheme level predominantly, is it?
Louise Davey: Not solely, but yes, we do see that.
Q258 Debbie Abrahams: Will that be something that you try to investigate during your trustee register?
Louise Davey: It will give us that visibility.
Q259 Debbie Abrahams: That’s lovely. What are the risks and benefits for sole trustees?
Nausicaa Delfas: On the benefits side, as Louise just explained, for the smaller schemes it brings professionalism, capability and experience to the running of the schemes. Of course, the risks are that if it is a sole trustee there is a lack of diversity of thought, possible conflicts of interest if that sole trustee firm also provides other services to the scheme, and those kinds of issues. As you have described, as we have seen the increase, this is something that we will be looking at. As Louise said, as gradually the market consolidates, perhaps there will be less demand for some of these trustees as well.
Q260 Debbie Abrahams: Assuming that a scheme does not start out as a corporate sole trustee, what are the circumstances that you, TPR, believe acceptable for a sole trustee to take over?
Louise Davey: It would be hard to give a closed list of what acceptable circumstances are, but certainly where employers are struggling to find trustees, where people are not coming forward to be either employer-nominated trustees or member-nominated trustees, we can certainly see a role for sole trustees there to ensure that there is trustee governance in place within a scheme. That is a fairly clear reason.
With sole trustees, we are not talking necessarily about one individual being a sole trustee. Where we have a sole corporate trustee, that will mean there is more than one individual involved. It also depends on the structure as to whether that sole trustee is part of a broader firm of professional trustees because then they will also have access to other resources and things that can be very beneficial to pension schemes. It is hard to say there is a defined list of acceptable circumstances.
Q261 Debbie Abrahams: You mentioned that sometimes there are conflicts and so on. Is it something that the employer should decide or is it something that the trustee board should decide?
Louise Davey: In reality, it is often the case that the employer is the person who has the power to appoint a trustee.
Q262 Debbie Abrahams: What are the pitfalls of that?
Louise Davey: A potential pitfall is that the employer might be looking for someone who will basically not challenge what the employer would like to do. That is an area where we would have concerns. The trustee is there to look after the members’ interests, not to just agree with the employer.
Q263 Debbie Abrahams: Given that we have just said it has increased 12% in the last year and that you believe it will be increasing for the next five years, but you do not know the extent of that yet, what are you going to do to try to safeguard and protect the interests of employees over the potential employer-driven sole trustee increase?
Nausicaa Delfas: I mentioned earlier our shift in focus from perhaps being quite compliance-led to looking at the market as a whole and looking at the market dynamics, and this is exactly the thing we want to be looking at and potentially speaking to employers, sole trustee firms and professional trustee firms. The point that you mentioned about the employer influence on trustees has come to our attention as well. This is certainly the kind of thing that we will be taking forward in an approach of looking at the whole pensions ecosystem.
Debbie Abrahams: I just have one question left, or have I? No, I have concluded. Thank you very much.
Q264 Nigel Mills: Nausicaa, I think that you are a few days away from eight months in the job. How have you found TPR? Is it what you expected? Is it better or worse than you were hoping for?
Nausicaa Delfas: As I mentioned at the outset, I have found that it is an interesting time to be doing this role because the pensions landscape is changing so much. That is why I think we need to change with it.
What I have found is that TPR is a very purposive organisation, very purpose driven, with a lot of capable people in it. What I am interested in now in the light of the market changes that I talked about is to look at how we can best deploy our expertise to be efficient and effective to deliver for pension savers.
Some of the things that I have been looking at, as I mentioned earlier, are that I have just hired the senior team for the digital and data team—the executive director and two directors of digital and data—to build up that capability. We have increased our investment team to get that bigger market focus, making all sorts of other changes around governance, a multidisciplinary team approach and so forth. The aim is to make sure that we are outcome-focused, that we are delivering the right outcomes for savers, and working together with the wider ecosystem, our regulatory partners, the industry and even those areas that we do not directly regulate. That is the aim.
Q265 Nigel Mills: A purposive organisation—what is the purpose?
Nausicaa Delfas: Delivering in the interests of pension savers.
Q266 Nigel Mills: I think that the vision from your predecessor was to be a strong, agile, fair and efficient regulator. Is that still the vision?
Nausicaa Delfas: Yes, building on that—strong, agile and fair. I think that there is a significant shift that we need to make from being quite compliance-focused scheme-by-scheme to more market-focused. Some of the areas we have talked about earlier around financial stability—buy-out, trustees and employers—are areas that we should be looking at in greater detail.
Q267 Nigel Mills: How would you score TPR, now that you have had a chance to get your feet under the table, on being strong, agile, fair and efficient?
Nausicaa Delfas: As I say, it is a very purposive organisation, and we are looking to constantly evolve. The pensions landscape is evolving. No one stands still and we are evolving with it.
Q268 Nigel Mills: That was not quite an answer, though, was it? Are you doing well at being strong, agile, fair and efficient or do you think that there is more to do?
Nausicaa Delfas: As I say, we need to evolve. The landscape that we regulate—
Nigel Mills: That is still not an answer, though, is it?
Nausicaa Delfas: We need to evolve with it. Of course, there is always more to do. There are always changes to make to be as efficient and as effective as we can be.
Q269 Nigel Mills: The criticism before was that you were not particularly strong or agile. Things took too long to intervene and then were not particularly strong enough in the interventions. Do you think that has been fixed now or do you think that there is less need now that the landscape has changed?
Nausicaa Delfas: This touches a little bit on the points that we were discussing earlier, and the framework that The Pensions Regulator operates under. Sometimes it is difficult to move quickly. Our framework is based on legislation. That is subject to the legislative timetable. What is good is that TPR has moved ahead of legislation quite often; for example, to set up the superfund regime as an interim regime without legislation. Now, going forward with master trusts on the DC side, we are going to be working on a value for money framework with our partner regulator, the FCA, working with master trusts on that before legislation is made.
We operate within the remit that we have. I think that we can build more, and this was also picked up in the public bodies review. We could build up our enforcement capability to operate differently from the way it does now; for example, by looking at the thematic work that we do across the industry. We do that work with our enforcement team so that if there are failings, we can take action more quickly than perhaps before where it needed to be handed between teams. These are examples where we are constantly evolving and moving forward.
Q270 Nigel Mills: What is the biggest risk that keeps you awake at night or that you think is a thing that could go wrong for pension savers?
Nausicaa Delfas: To be honest, I think that the biggest risk is around defined contribution at the moment and how we can make the system work as well as it can for defined contribution savers, who are increasing in number. It has doubled over the last 10 years with automatic enrolment, and we need to make sure that the system works as well as possible so that they can have a suitable retirement. Across DB, I think that it is just making sure that from TPR's perspective, we operate our capabilities on the market oversight side, which is the newer area.
Q271 Nigel Mills: One of your vision and values was to improve savers’ understanding of their situation to create better outcomes in their later life. How do you think you are doing on that one?
Nausicaa Delfas: That is very focused on DC because with defined benefit, of course, savers get promised benefits. Apart from the comments that colleagues have mentioned on surpluses and distribution, generally speaking it is quite straightforward.
On the defined contribution side, we think that there is more to do in that area. In fact, one of the three things that I mentioned—because as I said our focus is to protect savers’ money, to enhance the pension system and to support innovation in the interests of savers. On the innovation side, there is a real opening there for the industry to fill, to innovate, to provide some at-retirement solutions for people who save into the DC investment pot and then need some solution when they retire so that they have straightforward options and they are not scammed or ill-advised. That is something that we are focused on, and we think that there could be interest as well from the industry.
Q272 Nigel Mills: We greatly regretted that TPR was quite a long way behind the FCA on default pathways. The FCA was imposing those on schemes it regulated and TPR was just starting to talk about them at the time. Have you sensed that the FCA was better at this and that TPR needs to catch up?
Nausicaa Delfas: I could comment on what I have seen since I joined. There is a great deal of interest in what happens to defined contribution pensioners at retirement. One of the options that has been considered and we have been working with the Government on is collective defined contribution schemes, which could give greater certainty to people at retirement. As I say, we are also working on value for money, making sure that schemes deliver value for money in the accumulation phase and into decumulation. We are putting in place a number of factors that we hope could address this issue.
Louise Davey: Could I come in briefly specifically on the pathways point? This is one of the areas where TPR does not have the framework to be able to introduce pathways. This is an area that we would work with the DWP to introduce. In the call for evidence consultation that was recently responded to, pathways was one of the options that was looked at. It is something that would need legislation introduced to enable TPR to impose that in the trust-based pension scheme space.
Q273 Nigel Mills: There are a couple of recent initiatives that the Chancellor announced last week. The first one was effectively a default pension pot. There is a consultation on choosing. I can choose when I start a new job to stay in my old pension pot, in effect. Is that something that you support as the solution to this situation? Is that the option you would have chosen rather than pot follows member or whatever the other options we have had are?
Nausicaa Delfas: It is one of many suggestions around this decumulation phase in addressing the risks for pension savers. Of course, if we leave the system as it is now, a lot of people will end up at retirement with a lot of small pension pots from different employers they have had throughout their working lives. That could result in those being eroded with charges or not being as efficiently invested as they could be. We have been working with Government on different options. This is similar to the Australian model, so these are the areas that I think we should explore as a country to help to address these issues for savers at retirement.
Q274 Nigel Mills: There is some talk of a new duty or guidance for employers to get best value for their employees' pension savings. That was a paragraph in the Green Book. Do you have the powers to tell auto-enrolment employers that they should be switching pension schemes because they are in one that is not getting the right investment return or is not competitive?
Nausicaa Delfas: There are two aspects to this, and I think that Louise will want to come in as well. The value for money framework that we are seeking to introduce ahead of legislation will enable us and employers to have objective data on the value that schemes are delivering. Those schemes that are not delivering value should be considering winding up or consolidating. This will also be visible to employers and members.
Louise Davey: I think that is the key. The introduction of the value for money framework is what will give employers and anyone else the tools to see very clearly whether the scheme that they are in is delivering value. Other options are potentially being explored around where pension schemes under the new framework are deemed to not be providing value for money. They may need to write to the employers that use that pension scheme to tell them of that outcome. That would again help employers to make that call and build it into their decision-making about the pension provision for their employees.
Q275 Nigel Mills: Finally, I should ask the question the Chair thought I was going to ask. One of your objectives has always been to stop pension schemes ending up in the Pension Protection Fund, but we now have a strategy of trying to encourage pension schemes to end up in the Pension Protection Fund quite quickly by using them as some sort of default consolidator for weak schemes. What are your views on those proposals?
Nausicaa Delfas: We do support consolidation, as we have talked about, and support the consultation on this issue because it does need to be carefully thought about. At the moment, the PPF is a lifeboat for those schemes or employers that have failed. Consolidation might require a different gateway, and consideration needs to be given to the risks to other members in PPF and the levy payers. That is why it is excellent to have a consultation on this and to work through these issues.
Q276 Nigel Mills: Would you be telling trustees, “You can buy out. If you are in the range for a private sector consolidator, look at that. If you are not, look at the PPF as a way out”? Is the PPF becoming an investment provider rather than an actual consolidator in that situation? At some point, we have to tell trustees what to do and which one to pick, or which path they should be looking at, don’t we?
Nausicaa Delfas: Obviously on the PPF consolidator point, I am sure PPF will be best placed to respond more fully. However, you are right, if this were to pass, there would be different options for trustees depending on the state of the maturity of their scheme and the funding of it, so these are different potential options that you have mentioned.
Q277 Nigel Mills: Do you think small schemes cannot access buy-out and need a public vehicle, or do you think that option is there if they want it?
Nausicaa Delfas: There is an option there in terms of the superfund framework, which is taking off, and there are other options such as capital-backed journey plans and other means. There are different options for different schemes.
Louise Davey: It is true to say that typically not universally, but in many cases, it is harder for smaller schemes to secure a deal with an insurer, should they be choosing to buy out. Therefore, we think if the PPF is bringing a further option to the market it could serve schemes that do struggle to find other ways. Where they are not able to access other options, we think that is a good thing to be on the table for trustees to consider.
Q278 Nigel Mills: In your vision of being bold and agile and purposive—I am not quite sure what that means—don’t we need to be proactively telling trustees, “Look, you are in a pretty rubbishly run small scheme. You are too expensive. You are inefficient. You are not giving the right investment returns. This is not in the interest of your members. Do this for God’s sake”? Isn’t that what we need you to be doing, not letting 1,000 flowers bloom and hoping somebody does something and maybe in a few years something will have changed?
Nausicaa Delfas: Let me just answer that. At the moment, we are conducting a piece of work on schemes with assets under management of less than 100 million, and looking at whether or not those schemes are adhering to the rules on value for members. Where we find that they are not adhering to those, we can take action against them. Some are winding up simply from us turning up and addressing these issues.
What we do want from these schemes is that schemes that are not delivering value for members should wind up and consolidate with other schemes. That is what we are looking to do within the range of the powers that we have. Therefore, yes, we are active on that and, with the value for money framework that will be coming in, we will be able to also operate with the larger schemes on these issues. We are starting those discussions now.
Q279 Chair: Can I put some questions to you about superfunds? You mentioned earlier that you are now supervising superfunds without the benefit of a statutory framework. The Chancellor said he wants a statutory framework for superfunds soon. Were you surprised there was not a pensions Bill in the King’s Speech?
Nausicaa Delfas: As you will know, Chair, there is obviously a question of legislative timetable and capacity, but we are pleased with the support to have legislation in this area on superfunds, value for money and so forth.
Q280 Chair: Do you still think a statutory framework is needed?
Nausicaa Delfas: It would provide greater clarity and market confidence, but, as you can see, from what we have done already with our interim regime that has been issued with guidance from TPR, we have updated that guidance this summer. We are also going to produce more guidance on capital extraction, which we know people are interested in. We are continuing this regime. We are listening to the industry. We will continue to develop it, but of course, it would be better to have that legislative background to it to provide that bit more certainty for industry.
Q281 Chair: Right, so you do not need the statutory framework for what you are doing because you can get on with it at the moment already, but in terms of the wider background you think it would be useful to have?
Nausicaa Delfas: Yes, exactly.
Q282 Chair: The Prudential Regulatory Authority said that, in regulating superfunds, you ought to be looking at the same kind of things that it looks at in regulating insurers. How do your plans for regulation and your practice now in regulating superfunds differ from how the PRA regulates insurers?
Nausicaa Delfas: I will bring Lou in here on this issue. We do have a different regime to the PRA, but we do have considerable safeguards in the creation of superfunds and, also, if they run into trouble in terms of capital buffers and contingency. Lou, did you want to add something?
Louise Davey: Yes. There are many similarities in terms of the kind of structure of the safeguards that we have in place. The levels that are set out are marginally lower than what would be required under Solvency II, for example. That is very deliberate. The Government have made clear the intention that there should be clear water between the superfund regime and insurance-based and bulk annuity buy-outs, so that is deliberate.
However, we do have a gateway. There are requirements around which schemes are eligible to transact with the superfund. In practice and on a funding basis, if they can access buy-out that means that they are not able to transact with a superfund. However, we do apply a number of levels of scrutiny when we are assessing superfunds as well when they come to the market.
There are a lot of similarities there with what the PRA will be doing, and one of the key requirements that we do have is around the kind of capitalisation and buffers that superfunds need to have in place to ensure that security.
Q283 Chair: One of the specific points: you have a fit and proper person requirement. The PRA has its senior managers and certification regime. How do those two compare?
Louise Davey: The fit and proper requirement that we have for superfunds essentially mirrors the requirement that is in place for master trusts authorisations. That is the basis that we introduce or the equivalent for a trust-based arrangement.
Q284 Chair: How does it compare with the PRA?
Louise Davey: I do not personally know the details of what the read-across is. That is something Nausicaa could give more information on.
Nausicaa Delfas: Yes, obviously with the superfunds the fit and proper requirements are there in the master trust regime, which is the formal regime for the large DC schemes that have that level of rigour in them. It is not identical to senior managers, but it does provide that level of integrity and expertise, which is the same here in the superfunds.
Q285 Chair: Do you think, in terms of the level, it is comparable to the PRA’s with your own; is that right?
Nausicaa Delfas: Yes, it is a rigorous level.
Q286 Chair: Louise, you mentioned Solvency II a moment ago. As I understand it, superfunds have to submit capital modelling rather than meet anything like the Solvency II obligations imposed on insurers. Is your technical capacity up to scrutinising those very complicated models you get sent and evaluating them? Is the capacity to do that well in place?
Louise Davey: Yes. Well, as Nausicaa set out earlier, we are confident that we have the capabilities in place at TPR to do the job that we need to do. That includes the assessment of superfunds and we have been bolstering skills in the areas where we expect to see more activity, for example, in the investment team. We also have a large team of very skilled actuarial scientists, so we have we have those capabilities in place. Neil, did you want to—
Neil Bull: Yes, just to add that I agree with everything that has been said. Certainly, it is a bit of a joint effort between the investment and actuarial team—it fits between the two—on the assumptions and modelling and then also about the investments that are held. Both of those things are important.
There are members of the investment team who used to work in the insurance sector, so they are perfectly placed to look at what is, as your question alludes to, a regime that sometimes borrows—for example, in the capital piece—something from the insurance side. So, yes, we do feel very comfortable on both sides of the actuarial and the investment side.
Q287 Chair: Presumably, assessing those capital models is a new task, is it, or is it similar to things that you have done in the past?
Neil Bull: We are quite used to dealing with: is a buffer sufficient? What could go wrong from an investment point of view? Stress testing, investment scenarios. That is something that many larger schemes—certainly on the investment side—would look to do anyway. Many of us in the investment team, for example, have come from backgrounds where we did exactly that on behalf of DB pension schemes: looking at asset liability, modelling, scenario testing, and putting the assets and liabilities through their paces.
You are right that the capital buffer piece gives another dimension to it, and often the debate centres around whether it is sufficient and whether is it invested in an appropriate way to do that. Many of the skills that relate to DB read across to that, and, as I say, we are very fortunate to have people from the insurance company background who work on the investment side as well. They are very used to dealing with capital buffers and the modelling associated with it.
Q288 Chair: This exercise of consolidation will take some time. You have talked about the action you are taking for very small schemes. What is your strategy for slightly larger schemes but, nevertheless, fairly small, while we are waiting for consolidation to take place?
Nausicaa Delfas: Well, it is a continuous process. One of the aspects of the DB funding code is that it will help us to have a greater grip on those smaller schemes because we will be able to see from the data that they provide how they are performing and intervene more easily. That is going to be an important aspect.
We have a variety of ways in which we supervise and regulate. I mentioned earlier our thematic approach to supervision. We have different tools around that, so that is the approach that we are going to be taking. In terms of consolidation, as we talked earlier, we need to see how those smaller schemes can consolidate and at the moment there is a bit of a gap in the market, which is why the PPF consolidation idea is an interesting one. We look forward to working on that in consultation with our colleagues.
Q289 Chair: A final question on a different tack. In our report last year on “Saving for Later Life”, we recommended that The Pensions Regulator “report back to us by March 2023 on the progress that has been made in resolving concerns that the Privacy and Electronic Communications Regulations prevent schemes from doing so”. In response, you said you were working with the Department, the Information Commissioner and others to address this, and you would report back to us by March 2023 on the progress made. We did not hear anything by March, but I wonder whether you can update us on the progress or difficulties in addressing those concerns about the privacy and electronic communications regulations.
Louise Davey: Yes. This is an area that we continue to work on with the DWP. DWP is leading in this space, so in terms of timescales that would be a question for DWP in the context of other priorities. One thing I would say is that we are not hearing this as something that is commonly cited by trust-based schemes as being a particular issue. We do know that the Information Commissioner’s view is that it does not prevent occupational pension schemes and their trustees from communicating with their members, but that schemes do need to take care with the language that they use in those communications.
Like I said, we are not hearing it being routinely reported as a problem. This is something that we will certainly want to keep an eye on and work with the DWP in this space as we move towards more decumulation options for DC members being developed where there might be a greater role for trustees, and employers, in providing information and guidance to savers. At that point that is certainly something where we may see it becoming more of an issue, but at the moment that is not something that—
Q290 Chair: It certainly has been raised as a problem, hasn’t it? Some of the trust-based schemes do see it as a current problem, but it is not possible to indicate when a solution might be identified.
Louise Davey: This an area where legislation would be needed if there were explicit legislative changes to be made.
Chair: That brings us to the end of our questions to you. Thank you very much for all the information you have given us. You will come back to us on that USS point, won’t you, and the other things that you want to comment on subsequently? If you do, we would be very eager to hear that, but we are very grateful to you for all the help you have given us this morning. That concludes our evidence session.