Work and Pensions Committee
Oral evidence: Defined benefit pensions White Paper, HC 956
Wednesday 6 June 2018
Ordered by the House of Commons to be published on 6 June 2018.
Members present: Frank Field (Chair); Heidi Allen; Jack Brereton; Rosie Duffield; Ruth George; Steve McCabe; Nigel Mills; Chris Stephens; Justin Tomlinson.
Questions 85-166
Witnesses
I: Yvonne Braun, Director of Policy, Long Term Savings and Protection, Association of British Insurers, Baroness Jeannie Drake, pension scheme trustee and Governor, Pensions Policy Institute, Helen Miles, Squire Patton Boggs, LLP and Bob Scott, outgoing Chair, Association of Consulting Actuaries and senior partner at Lane Clark & Peacock.
II: Oliver Morley, Chief Executive, Pension Protection Fund and Sara Protheroe, Chief Customer Officer, Pension Protection Fund.
Written evidence from witnesses:
Association of British Insurers
Association of Consulting Actuaries
Examination of witnesses
Witnesses: Yvonne Braun, Baroness Jeannie Drake, Helen Miles and Bob Scott.
Q85 Chair: Hello and welcome. Might we begin, please, with you introducing yourselves and where you are from for the record, but also as a test that we can hear you?
Yvonne Braun: I am Yvonne Braun. I am Director of Policy, Long Term Savings and Protection for the Association of British Insurers.
Baroness Drake: I am Jeannie Drake. I am a trustee and I have a history of involvement in public policy on pensions such as NEST and PPI, things like that.
Helen Miles: I am Helen Miles. I am a pensions lawyer at Squire Patton Boggs, based in the Midlands.
Bob Scott: I am Bob Scott. I am a partner at Lane Clark & Peacock and the outgoing Chair of the Association of Consulting Actuaries.
Q86 Rosie Duffield: The Pensions Regulator has recently replaced its old slogan of “educate, enable, enforce” with “clearer, quicker, tougher”. Do you see evidence that TPR is living up to this ambition or is this little more than words?
Baroness Drake: I did think about this question and I looked at what I could see that it was doing with its own organisation and what the external evidence was. If one looks at its corporate plan, there is clearly a change in its KPIs, and the future headcount; it is working more closely with the FCA. I see those as positives. On its annual funding statement, it has raised the dividend issue. It is putting much greater emphasis on long-term funding, which is important for the closure of a lot of these yields. In its “TPR Future” document it is clearly changing its approach to risk scanning across the whole population. I saw those as very positive issues.
What we also need to see is what is the experience of employers and trustees in the light of that. I think TPR now has lots of examples where it has moved quite quickly, so one assumes that is a response to the new approach. I think for trustees the evidence may become more how you feel when you are into your valuation. I think we are going to have to wait a bit to see how that emerges. We are aware that it will follow through on its scanning of the wider pension population proactively and not wait for valuation and say, “We just want to have a look at your deficit funding”. I can see emerging things, but it is work in progress and I think there are still ways in which it needs to be tested.
Q87 Chair: Does anyone disagree with that?
Bob Scott: I do not disagree, but could I add something? I agree with Jeannie that cultural change is under way, but these things take time to work their way through. It was July last year that they published “TPR Future”. I have certainly seen, in my dealings with trustees and employers, evidence of clearer, quicker and tougher. For example, clearer by saying, “We will not accept valuations that are more than 15 months from the due date”. Quicker in its proactive response to companies that publish accounts that show increases in dividends—you get an e-mail from the regulator; companies with profit warnings, you get a phone call from the regulator the following day following up on those. Tougher by a clear willingness to use the power that they do have, not their nuclear powers, not their section 231 funding powers, but powers to fine trustees, powers to take people to court for failing to provide information. I think I have seen gradual evidence. It will take time to fully come to bear.
Q88 Justin Tomlinson: You mentioned “some gradual” and “take some time”. That gives the impression that we are some way off. What is your feeling on that?
Bob Scott: I think pensions do tend to work on a relatively long cycle. If the regulator notices that there is something that it wants to look at and it starts proactive engagement, it can be months or years before the results of that come through, with valuations, with discussions about funding and so forth. It is not something that will happen overnight. If the regulator did decide to take someone to court under its funding powers, again that would be, under the current legislation, quite a slow and extended process.
Q89 Chair: But on Justin’s point, if we had you back in a year’s time, would you still be saying it is work in progress, it is all heading in the right direction and making the right noises, or do you think we would see actual changes, Bob?
Bob Scott: I think the test will be whether they have the resources to follow up on the cases that they identify and whether they will have been able to take effective action. Every regulator is resource constrained and we cannot just give them unlimited resources, because that costs the industry. But if they can pick their cases, if they can take action in cases that make a difference, yes, in a year’s time I think we would.
Helen Miles: We are seeing quicker engagement and signs of being increasingly proactive. I think many trustees will welcome that because they can see more clarity on the regulator’s view of what they are doing, particularly if they are in a difficult position. I think trustees will also welcome seeing what the regulator does in putting pressure on employers where that is needed. But I would not disagree with Bob that the actual outcomes will take time to see. Agreement of a funding plan that is better than you would have perhaps had without the regulator’s intervention will then have to trickle through to delivery of that and how that affects scheme liabilities.
Yvonne Braun: I agree with my colleagues. What I would add to this is that we also need to see the legislation about having a chair of trustees and having a chair’s statement of trustees that is in the DWP White Paper. While many trustee boards have a chair and do a statement, from a governance point of view it is simply not credible not to have a chair, who is ultimately the person who carries the responsibility for decisions that are made. If you do not have a chair, there is a risk of drift and that is not good for members and members’ benefits.
Q90 Heidi Allen: We understand the commercial reality of businesses needing to make money and the relationship with shareholders, but what we have seen, particularly in our Carillion inquiry recently, is that the balance between dividend payments and pension deficits gets disproportionately skewed. An interesting figure is that in 2017, FTSE 100 companies paid six times as much in dividends as in pension contributions, which sort of sets the scene.
Bob, if I can perhaps start with you and then take other people’s views, because I think your organisation has already suggested the idea. This is pressure for trustees, and we heard from the Carillion trustees that they were trying to sound the alarm but were getting nowhere with TPR. This concept of a notifiable event is something that trustees could take to TPR, saying that dividends are excessive. Is that something that you think we should move to? If so, what is excessive? How do trustees understand how much that is?
Bob Scott: My firm has recently published the report that you refer to. I think the headline figure that dividends were six times the amount of pension contributions is an aggregate and hides the characteristics of individual schemes. If you were looking for a definition of what was excessive, it would need to be more granular and done by schemes.
Q91 Chair: Bob, doesn’t that figure mean that some companies are rather good in the relationship between dividends and pensions contributions and others are pretty awful, if that is the average we are coming up with?
Bob Scott: It could do, but also the other factors that I think are very relevant are the extent to which the company that is paying the dividends is generating profits and cash—so if those dividends are supported by the company’s earnings or the company is paying out dividends that it has not really earned. Secondly, there is the size of the pension scheme and the pension deficit in relation to the employer. An employer that is cash generative, profitable and has a small pension scheme may well pay out dividends that are a significant multiple of their deficit funding while still treating the pension scheme very reasonably.
We did some further analysis in our report, looking at not just dividends versus pension contributions but dividends as a proportion of profits on one axis and deficit contributions as a proportion of the buyout deficit. The buyout deficit is the amount that you would have to pay to an insurer to secure the benefits in full. Companies that pay dividends that are a relatively high proportion of profits and are where the deficit funding is a relatively low proportion of the buyout deficit are the ones that you would focus on if you were looking at excessive.
Q92 Heidi Allen: It is that ratio, isn’t it?
Bob Scott: We did some analysis in that report to identify and there is a small proportion of the FTSE 100 that would fall into that. It would be those sort of situations that you would focus on if you were looking at excessive.
I can see some merit in reporting to the regulator a notifiable event. Perhaps a dividend that would be reportable was one that was increased by a certain proportion from the previous years or a special dividend, but it would be something that made it stand out from the past.
Q93 Heidi Allen: Forgive me, because I have not read your full report. Do you put in there detail about how that ratio might be calculated?
Bob Scott: We have done it on the basis of figures that we have extracted from the accounts to give an indication. It is as straightforward as the dividends divided by the profits down one side and our estimate of the buyout deficit in relation to the deficit contribution to pay. In practice, you would need more granular examination of the particular company circumstances, but that gives a feel for the likely number that might be judged as potentially excessive under that sort of definition.
Q94 Heidi Allen: This would be a new notifiable event. How easy would it be to add that to the list of tools that the trustees have?
Bob Scott: I think it would be relatively straightforward to add that as a notifiable event. In some cases, it would result in no action, but it would flag up extra employers and extra pension schemes that would warrant further scrutiny.
Q95 Heidi Allen: It is almost like one of those things they describe on the dashboard, isn’t it? If one of the lights goes on, if that ratio goes a certain way, that sets the alarm bells off.
Bob Scott: Yes.
Q96 Heidi Allen: Thank you. Helen, Jeannie or Yvonne, do you have any views on that?
Helen Miles: A number of schemes do have good employer engagement when dividends are to be paid and there is a discussion about those. Anything that encourages that discussion, so certainly trustees having to say to an employer, “This is starting to come into an area where it would be notifiable to The Pensions Regulator”, is certainly an opportunity for trustees to open the discussion with the employer and make sure that they are acutely aware of the scheme’s needs as well. It could be something that in the circumstances of a particular employer is manageable and not inappropriate. I think the opportunity to involve the regulator is one that gives the trustee more opportunity for engagement with the employer, which is generally a positive, in my experience.
Q97 Chair: Can I go back with you, Helen, to Bob’s point? Surely there are a number of firms who behave really well, who make profits and look after their pension schemes as best they can. There is another group of employers who make profits from their business, and we might question whether they should not be paying more into the scheme. We have only investigated companies where they borrow to pay dividends and make terrible comments about contributions to the pension scheme. If you were the new Pensions Regulator, these are the categories, aren’t they? One is where the group is going well and another is where trustees should talk with the employers about perhaps getting a better cut of the dividend that is being genuinely made by the firm. Then we get into the area we are questioning of why firms are borrowing to pay dividends. Isn’t that an area where the new Pensions Regulator might be putting quite a bit of his or her time?
Helen Miles: It would be useful to have from the regulator a guidance or a policy in that area to make quite clear what they consider is appropriate behaviour for schemes. If you are looking at pension schemes who are finding promises of “jam tomorrow”, the more that schemes can do to ensure that that jam is available tomorrow and have binding contingencies there the better. We are already hearing that from the regulator and a lot of the trustees I work with have taken that quite fully on board.
But it is about continuing to have that engagement on what the covenant looks like, what it is made up of, the complexities of the employer covenant versus the scheme’s need and, as we see schemes maturing, the actual needs they will have. Some of them are starting to decumulate, they are starting to pay out more in benefits than they have coming in in contributions. It is also very important that those balances are being taken right across the piece.
Q98 Chair: Jeannie, on the political level with all of this, as MPs in our surgeries, we only hear about failures usually, where policy is not working. Thank goodness people do not come and talk to us about when things are going well. One of the things that seems to me to be missing from our debate on pensions is acknowledgement of those employers who are doing well, who believe in this whole concept and are delivering to the very best of their abilities. Do you think it would be good for the new Pensions Regulator to have some pressure to say if you reported on the numbers who are doing well it is an encouragement to others? “You are not a freak doing this; this is normal procedure.” My worry is that we, quite rightly, report and suggest reforms and it looks somehow if as the whole industry is wrong, whereas quite a number of people are doing rather well and we should sing their praises. How do we make up for that bias, Jeannie?
Baroness Drake: I suppose it is in the nature of the work you do. You are often looking at things when the crisis has crystallised and therefore, by definition, you are looking at what is going wrong. You are right, there are good employers out there who are perfectly aware of their responsibilities and have good constructive relations with their trustees and are seeking to do this. It is not fair on them if there are other bad employers and it is not fair on the PPF; the good employers will make the PPF sustainable because they will be there to carry on paying the levy. It may be worth having a discussion with The Pensions Regulator about how it can present evidence in a way that you can disaggregate and see what best practice looks like and what they are doing. I think there is scope for that.
On the issue of the dividends themselves, it is a scheme-specific funding regime, so there is scope anyway, without changing the principles of the scheme-specific regime, to deal with the sort of things that Bob was talking about if there are particular circumstances. But for me, if you are getting tougher and if you are setting clarity of expectations, you have to address the dividend issue, and you have to say, “Is there a fair distribution between what goes into the fund and what is paid out in dividends?” It is on three levels: the contributions that are paid, the length of the recovery period and back-end loading.
In my view, if you are a regulator and you are pushing for greater clarity, looking for fairness, looking for controlling risk, I do not see how you can avoid looking at the dividend issue in those employers who are choosing to put much money in and paying out in dividends, rather than what I would think is a fair allocation to the scheme. If companies are borrowing to pay dividends, as a trustee I would say, “What does that do to my creditor status? If you are leveraging your company by borrowing more, that covenant has more debt in it and what that does mean for the contributions I am getting?” I would see that as part of my job. I would be worried if that was happening in those circumstances.
In terms of the good employers, I think it would be good to have a kind of positive dialogue with the regulator about how that kind of best practice could be brought out and what good looks like. Especially as they are going into clarity and expectations, that would go hand and hand with it. But I certainly think it is right to say, “Is the balance right in some companies between the pay-out of contribution as opposed to deficits: the timing of those, the length of those, the back-loading?” I think in some circumstances they will not be right.
Q99 Chair: Yvonne, do you have anything to add?
Yvonne Braun: I very much concur with what has been said. I think ultimately this is about a more muscular approach by trustees, which is backed up by a more muscular and proactive approach by The Pensions Regulator, which is what they are moving into.
Q100 Nigel Mills: I am always quite keen on this sort of thing to try to make sure we have bottomed out exactly what we are suggesting everybody should do. Presumably we have two options. First, we can either say that perhaps in the deficit recovery plan there should be some explicit covenant calculated that says, “You cannot pay a dividend out to your shareholders unless you have hit these measures and you comply with a deficit recovery plan”. The other option would be to have some generic ratios, which I think Mr Scott was advocating, which the regulator could use as part of its landscape assessing or something to say, “We think these schemes are out of kilter so action should be taken”. Are we advocating both of those being put in place? Are we saying that the regulator should say to all pension trustees, “You should have some sort of covenants or measures or something in place with your employers where there is a deficit, which determines when they can pay a dividend and how much, what the conditions are and whether there should be a notification”? Or do we think one of those two is enough?
Chair: The question is, isn’t it, how much more do we want than an arrangement to pay over a certain period of time, whatever the deficit and whatever the dividend policy is? Nigel is asking you what we should be advocating over and above what we have now.
Helen Miles: I think one of the difficulties is that covenant leakage takes many forms and is not just related to dividends. Would you be looking at other restrictions of covenant when you go down a particular route on dividends? The other one is that some trustees do negotiate those sort of agreements around how funding reacts to various triggers within the operations of business, so it is not outside of trustees’ current operations to do that. It is not desperately common, but it can happen.
Q101 Chair: Could you send us examples where that has worked?
Helen Miles: I probably cannot without risking a breach of client confidentiality, Frank.
Chair: You could redact the names for us, couldn’t you?
Helen Miles: I will try to recall one off the top of my head.
Chair: If you could, that would be great.
Q102 Nigel Mills: Are we saying that should be best practice or what the regulator expects trustees to be doing where there is a deficit recovery plan?
Helen Miles: I am not convinced that the regulator would need to go that far, but certainly some guidance and suggestions on that may well be helpful. There is probably quite a lot out there for making trustees aware of that and of other stakeholders, not just the employer. I will give an example of a business I worked with a few years ago where the scheme had slipped in its priority because of other borrowings, although the business was progressing well and it is still in existence. The trustees were able to negotiate at a point in time where there was a refinancing of a particular priority for a certain amount of their liabilities.
At a later stage, a subsequent transaction—interestingly it did not technically trigger the priority treatment—the bank in question said, “We would like the business to honour that priority treatment for the scheme here”. It is not just about the employer’s actions, it is about all the parties, the trustees having opportunities, where they arise, to get a preferential treatment agreement with triggers within the operation of the business. Then all the parties involved are living up to the spirit of that, not just the letter of it. There are good behaviours. I am not here just to give you a rosy picture, but obviously where things work is important.
Chair: Absolutely, spread good practice.
Yvonne Braun: I would add to that that you see in the Financial Conduct Authority’s work examples of good practice and examples of bad practice to make it clearer to the industry what needs to happen. I think something similar could be quite useful from The Pensions Regulator, because it basically sets out to trustees the sort of things that are expected and the sort of knowledge and expertise that they need to have. We know from TPR’s own figures that knowledge and expertise in some cases can be not where it needs to be. I think that would be quite useful signalling from TPR.
Q103 Ruth George: I think a lot of what I was going to ask initially has been covered. That was around the White Paper’s proposals for TPR to consult on greater clarity in funding standards and what you would be looking for in that clarity. Is there anything you would like to say in addition to what you said in answer to the previous questions on what clarity is needed from TPR?
Bob Scott: First of all, I can understand why the regulator would like greater clarity, because at the moment they might feel that a set of assumptions is imprudent or a recovery plan is inappropriate, but establishing that in a legal setting is not straightforward. My own view is that defining things too tightly would be counterproductive. We had a minimum funding requirement 20-something years ago and events meant that that measure soon fell out of date. The Pensions Regulator itself set initial triggers when it came to it in 2005, based on corporate bond yields, and the credit crunch soon blew those out of the water. I think defining something tightly would not be helpful. I do agree with the comments about best practice standards, about showing evidence of things that they believe work well. They already do publish case studies and things. I think they could usefully do more of those to help people and also to publish examples of things that are not acceptable to them, not to define things tightly but to give people more of a feel for where things should be moving.
Chair: Yvonne, you were nodding very strongly on that.
Yvonne Braun: I agree. I think examples are really critical, because it is quite difficult generally in regulatory practice to be totally specific about what needs to happen. Often the way that is addressed and the way firms in my world, which is more the FCA world, are given greater clarity is with these examples. They give you more of a flavour of what is expected because the circumstance may well be quite different.
Q104 Ruth George: Do you think that TPR should be taking more funding cases to court to establish precedents and greater clarity in that respect?
Yvonne Braun: I was not necessarily saying that. I was more saying that they should set out what they have seen and what they regard as good practice. They can make that anonymous without identifying the company, because it may be commercially confidential, but surely you can say, “In this case we have seen this particular circumstance. This is what happened and this is what the members did” and so on. With that you can give other trustees a better feel for what is expected.
Baroness Drake: I am probably in a slightly different position on that continuum. We have moved from the MFR into the scheme-specific regime. Scheme-specific is right in principle because the covenants are in different circumstances and in different industries, but I do think that probably in that scheme-specific regime you have a great divergence across schemes and you have too much latitude in the regime. It is on the three issues that the White Paper identifies: what should prudence look like in assessing the liabilities, the issues around appropriate recovery plans and what you are targeting as the long-term view? A lot of these schemes are now closed. They are going to move towards peak payment in their pensions, they will not be able to rely on investment returns in the same way, they will have cash flows. I am in the camp that says there has been too much latitude. I think that message is coming out probably from the regulator now and we do need more clarity—the parameters within which prudence operates, what is an acceptable recovery plan.
Having read the PPF submissions, I get the feeling that that is also being said there, that the scheme-specific nature gave too much diversity and variance, that you need to tighten it and route in on three levels. I would do that. I do not think the good employers and the good schemes have much to fear from that, but tightening is due. Yes, I would do it.
Q105 Ruth George: That leads me on very nicely to my next question. What are your views on the PPF’s proposal that 10 years should be the maximum recovery plan and, if not, there should be more of a “comply or explain” approach and it should be very much outside the norm that you would have longer than 10 years?
Yvonne Braun: It appears sensible. This near term still gives employers flexibility in those 10 years, but it gets rid of some of the more egregious examples that we have seen.
Helen Miles: We had 10 years as a softly-drawn line in the past and that had to be left because of a potential clash with some of their other objectives. I think it is always helpful for trustees to know what is expected of them, so an idea around the “comply or explain” idea is okay as long as we see a consistent and I would hope quite speedy response to that. Trustees do not like feeling they do not know what the regulator thinks of what they have done. Particularly if they have had to go to the edge of a boundary for good reason, they need to understand when that has been accepted.
Q106 Chair: Helen, what do you mean by “speedy”, please?
Helen Miles: I think probably for most schemes, if they are wanting to get the valuation signed within the 15-month time limit, they want to understand within no more than another three months that the matter is concluded.
Bob Scott: I take a different view from my panellists. I think that when we had a 10-year recovery plan trigger, many schemes defaulted to nine and a half years, which was not terribly helpful. If you impose a recovery plan of a certain length, you may find that you introduce more risk into the system. For a scheme looking to meet a low-risk funding target, say over a period of 16 years, it might be a better outcome for the scheme in terms of higher contributions and lower risk than saying, “You have to have a recovery plan of less than 10 years, so let’s meet a higher-risk funding target with greater investment risk over eight years”. I think again it needs to be scheme-specific and in relation—
Q107 Chair: That is how the BHS scheme was sold to us.
Bob Scott: I think the BHS scheme was taking extra investment risk as well. There could be some merit in saying schemes had to reach the PPF funding level over 10 years, but I think to say the full recovery plan over 10 years would be too prescriptive.
Baroness Drake: In principle, a comply and explain regime is good, as long as there is rigour around the explanations for those who are not complying, as opposed to just putting it in a box. I would question why it is as high as 10 years, in the sense that having looked at the figures in the White Paper, something like 56% or thereabouts of schemes are coming in just below 10. You run the risk that the 10 becomes normative and you drift up, whereas clearly lots of schemes could come in below 10, and if you are holding them to a rigorous recovery plan, why would you wait 10 years? If you set 10 years, you could make it easier for some schemes, which might otherwise have paid earlier, and you could become normative. Whether I would agree with the 10 years as opposed to some comply and explain regime based on some other robust premise—
On Bob’s point, we are having a debate here. I take his point that you do not want to push people into having a risky investment strategy in order to meet some time period, but I think you can pick that up in the explanation. If the explanation is, “We can only have a quicker recovery period if we take on risk”, that is a way that you deal with the explanation. It is not a reason for not having a comply and explain regime, it is about how you deal with the explanations you receive. I think the concept of comply and explain is good, because you get the focus, you get the flagging. What do you do with the flagging when it comes up? It was just that 10 seems higher, particularly as a lot of schemes are going to peak off their pensions in payment and their cash requirements between 2020 and 2030. I was thinking 10 years is quite a lot of time if you have an employer who can pay contributions and deal with the deficit in an earlier period than that.
Q108 Ruth George: Could I ask you one last very quick point for quick answers, please? At the moment, around one in five schemes—that is over 1,000 schemes—have a recovery plan length over 10 years. Do you think that is too many?
Bob Scott: I think ideally they would be shorter, yes.
Helen Miles: It feels highly subjective. I think as long as we are content that trustees feel that is appropriate, that is not too much, but that is the question, isn’t it?
Baroness Drake: My instinct is that they should be shortened and there should be fewer.
Yvonne Braun: There should be clarity about the reasons why it is longer than 10 years, comply or explain.
Q109 Nigel Mills: I sometimes wonder when I hear these debates whether we do not envisage the Pensions Regulator becoming a super-trustee for every pension scheme. I guess there is a risk that we try to bind trustees so tightly that they effectively are just ciphers, doing what they are told. I sense that is not what the regulator thinks it is going to do or not what we have put in place for it to do, but is there perhaps a sort of compromise, like we have in other sectors, where if you see trustees of a scheme really struggling, the regulator has some sort of super-trustees on a scheme—like super-head teachers or something—who can be sent in to rescue the situation? Do you see any merit in there being a group of really skilled trustees who could be sent in to help sort out really bad situations?
Bob Scott: I think it is a useful and helpful suggestion. It would be subject to finding those people, having them available, because most super-trustees are probably already heavily involved in other appointments and cost as well. It is an idea that is worth considering. It may be difficult to implement on a large scale.
Helen Miles: The regulator already has powers to appoint trustees, particularly if it thinks that is to better protect members’ interests or if it is concerned about the skill and knowledge of the existing trustees, so that framework is there. The idea of a super-trustee—obviously with a legal background I would look at how they would operate. If they are just another trustee at the table, they will not necessarily be able to change any decisions. I think there is a lot to be said, if you have that sort of regime, for combining it with a requirement for training of all trustees to make sure that they are working as a team at a similar level. But I would agree with Bob’s point, resourcing this would be an issue potentially, because the market is quite busy for professional trustees and indeed the cost would need to be managed, because we do not want to be taking money out of schemes that are in need.
Baroness Drake: On the underlying principle point, are we asking the regulator to be a super-trustee for every scheme, I felt one of the gaps in the White Paper was there was not a lot about the role of the trustees and strengthening the trustees, because they are the first line in discharging the fiduciary duty. There was lots about improving the information powers of the regulator and so forth, which I do not disagree with, but there was nothing in there about strengthening the rights of the trustee to information. There are a lot of good trustees out there, lots of good chairs and trustees who want to do a good job, but there is a limit to their powers, so if you face a problem you can only discharge your duty within the limits of those powers.
As I said previously, particularly in major corporate events situations, it can be quite important to know, as a trustee, what your rights are for accessing information, otherwise you do keep pushing them back to the regulator, saying, “Can you use your information powers?” I would have strengthened the role of the trustee in that situation, because there are lots of good trustees out there as well as the ones who maybe do not perform on every occasion.
In terms of a taskforce, again a lot is being done to raise the standards of governance and knowledge and understanding of the trustees. Any initiative that helps to improve that is good. I hesitated a bit on a taskforce for trustees in difficulty because you do not want to add a layer of confusion to the quicker, tougher, clearer regime. What is the role and status of that taskforce and how would it integrate with the mainstream activities of the regulator? If it was because trustees were in difficulty, what kind of difficulty? If it was a big funding problem, would you want to take them off to a taskforce when it should be a more direct relationship with the regulator?
I had some questions about how it would operate in practice. The concept of a pool of people who would be available is not in itself a bad idea, but I think you would have to operate it in a way that did not muddle that kind of clarity between the regulator and raising the governance standards and what is expected. But I am not averse to anything that helps to support trustees in being better at governance. I would not rule it out in principle. I think it is how it would operate in practice.
Yvonne Braun: Senior advisers from the industry are used in the FCA to advise the FCA, to get an industry input. I think that is considered to be a very good thing. I suppose the super-head teacher that you are envisaging would work with the trustees. As Baroness Drake was saying, how you would operationalise this to make sure that the lines of accountability are clear needs to be thought about very carefully.
Q110 Jack Brereton: I want to particularly ask about the proposals in the Government’s White Paper for new punitive fines and a new criminal offence. Do you think that these proposals will prove an effective deterrent to tackle irresponsible behaviours by directors?
Helen Miles: I will start by saying I am not a criminal practitioner, so I cannot do a deep dive into the offences themselves. I am also conscious that most of the people we see will not be out to do things that are criminally reckless. The threat of a criminal sanction makes people think very carefully, so if there are areas where there is a criminal sanction, say under section 72 with the information gathering, people we talk to are quite acutely aware there is a line there and there could be a criminal sanction. That makes them take it very seriously. In truth, do they take it any more seriously than other obligations? It probably makes them swallow a bit hard, but I think most people do take the whole piece quite seriously. It is difficult to know what would be a deterrent for rogues.
Q111 Chair: We have begun a conversation as a Committee. In a previous report of the Government on PIP, the Government engaged like no other Government, in my experience, and have come up with what I thought was almost impossible, but that is within the Government. If we look at our work on Carillion, it seems that there is no shame great enough to change anybody’s behaviour, for people to accept any responsibility at all. We are, as a Committee, going to be thinking about how we try to make it—without getting too Napoleonic and grand for our role and all the rest of it—become more effective for people out there, who feel there is a large class of people who just get away with it when it comes to it?
We now have an example of how Government have behaved, who have been admirable in responding to our report, and we have Carillion. It is within this framework that people come here. They have been trained by supposed experts and nod their head in shame and say, “Oh, we are so sorry”. They do not give a penny piece over and all the rest of it and then they walk away. What Jack is searching for is when we have done our report, what needs to follow for the vast majority of people, many of them disengaged voters, because they think this gang gets off with everything and nothing much happens?
Jack’s question is—I am just putting it slightly differently—how do we put the fear of God into some of these people, who currently seem to have no shame whatsoever about their behaviour? Helen has rightly said, “I am not a criminal lawyer”, but she is not against having a go at them. Bob, what do you suggest in reply to Jack?
Bob Scott: I think I am in Helen’s court, really. Company directors are already potentially liable to a large number of criminal sanctions under the Companies Act. Despite those, there have still been gross failures in corporate governance. Adding a specific offence in relation to the pension scheme may not deter those who ride roughshod over their obligations anyway.
Q112 Chair: What is the solution, Bob, please?
Bob Scott: A solution? For shaming people and getting them to address their pension schemes properly, I think you can make laws and you can make rules, but people will still break them. I would suspect that the likely response of recalcitrant directors to such a sanction would be to engage their lawyers to find out how they can avoid being judged reckless and irresponsible, but that is not the same as engaging in how they can be responsible.
Baroness Drake: It is a difficult one: will all these extra penalties and criminal offences stop bad behaviour where bad behaviour is going to occur? When I read the Carillion report, sometimes the problems in the pension scheme is a manifestation of a much deeper problem, a bigger corporate problem in the company. I did read the reports of the Cabinet Office about the performance of Carillion against their contract. I read what was published, so I am not saying anything that was not published. They were still awarding them contracts and you have the issue of the accounts. In a sense there is a limit to what a pensions regulator can do where the driver for the pension problem is a much bigger corporate governance problem and there is a danger that you smack The Pensions Regulator for something that is outside its remit. You can say, “You should have seen it”, but can you seriously ask a regulator to check every report and account of every company that is within their remit? I do not think that is a viable option.
I have a definitive answer, but I do feel that when one looks at regulators, whether it is the Pensions Regulator or the FCA, there should be more scrutiny of the extent to which they are efficient and proactive in responding to emerging risk. How are they measuring it? How are they internally flagging what they see and how proactively are they doing that? Just testing some of those areas may be a more fruitful route: how do you find it, what do you do when you see it, how proactively do you respond to it? That is resource intense. It is a public expenditure issue. Regulators are monitoring compliance with a whole pile of regulations, but at the end of the day a core activity is the efficiency with which they manage emerging risk or they monitor to see what that emerging risk is. That may be a more fruitful way of looking at it.
Yvonne Braun: I think that is definitely right. They have a very tough job, as Baroness Drake has just said, in terms of other things they could look at to identify what might happen to the pension scheme. Having a proper risk-based framework and articulating that and explaining what they are seeing and how they go about monitoring what is going on is important.
The question of a criminal offence is tricky. How enforceable is it? I generally think, probably because I did a bit of criminal law when I studied law, that criminal offences can be quite useful because they have a signalling effect and you make it very clear that you are not going to tolerate that behaviour. It may not be so easy to enforce them, but the signalling effect can be quite useful.
Q113 Jack Brereton: That brings me on to the next point that I was going to ask about, which is the workability of the criminal offence. The definition in the White Paper is “wilful or grossly reckless behaviour”. Do you think that is defined clearly enough or does there need to be greater clarity so that it is a tool that can be used to deter this behaviour?
Helen Miles: I would be concerned about an offence for which a prosecution can never happen or never succeed. It is too unclear and you never find the circumstances because the deterrent effect is diluted. Also the level of sanction will focus minds.
I think when we are looking at pension schemes in a large and complex business there are so many moving parts that isolating the point where improper or criminal behaviour as defined occurs in relation to the pension scheme could be very tricky. You do not try to do it, but I think the definition would need very careful consideration. At what point does trying to balance the competing interest within a complex business become wilful or grossly reckless behaviour vis-à-vis the pension scheme and defended by, “But I was trying to do something else”, which is also a laudable objective. You can see the kind of thinking behind that, so the more clarity the better if things are going to be proceeding.
Yvonne Braun: I would agree with that. It is a high test, of course. I think we should not forget that.
Q114 Chair: When a group of past MPs and Lords were advising a Prime Minister about a new Slavery Act, Lord Judge said, “Stop fussing about trying to define slavery. A British jury knows what slavery is. You just have it on the face of the record and trust the juries, if they are presented with the evidence, to come to a proper decision on that.” Is that, therefore, not going to apply to pension negligence, let us call it, whatever phrase we use, or is it so complicated that the British jury scheme could not recognise whether or not an employer had been up to bad business?
Bob Scott: It is an interesting point. The finances of a pension scheme are affected by many different things, not just the behaviour of the company directors. You could have a pension scheme that successfully pays all its benefits yet the directors behaved badly, and you could have another scheme where the directors behaved well and yet the pension scheme fails for other reasons.
I am not a lawyer or a criminal lawyer, but I think in the absence of a smoking gun it would be very difficult to pin down and say, “Yes, such behaviour was wilful and grossly reckless”.
Q115 Chair: Jack’s question is about whether we try to take enough cases to court to see whether the law is adequate to convict. The get-out of those who consider whether there should be a prosecution is that we do not get any prosecutions because they do not go to court. Are enough cases going to court for the courts to decide whether this is reckless behaviour and so on?
Bob Scott: It is possible that more cases going to court would help, but if they establish that it was not wilful or grossly reckless behaviour you may be no further forward.
Q116 Chair: We would not be further back though, would we?
Bob Scott: Okay.
Baroness Drake: I think TPR should be willing to test their legal powers. If they are reluctant to do that—and looking back some way into the past they probably were—people get a sense of that. I would welcome a cultural change that they would be prepared to take cases. Even if there are weaknesses, you learn from the weaknesses; you learn if there are weaknesses in the law, if there are weaknesses in the strength of the case or how to present the case. If you do not test that, you are just avoiding the issue, and I think there should be a greater willingness to test that.
It does mean that legal cases can run on for years. There are some already in the system that have been running for years and in a specific funding regime there are more variables. You do not necessarily get the clean precedent that will allow you to use it in every case. I would not have TPR rushing off to court on every occasion because that would be counterproductive, but where they are willing, where the case is good, where they feel the strength of their powers or the legal framework should be tested, they should be culturally prepared to go and be prepared to lose, because sometimes you gain from losing as well.
But also there is an opportunity in the code of practice if there is that level of strengthening in compliance to also strengthen the powers; so you would not want to rest wholly on cases if the Government do use primary legislation to introduce a stronger code of practice. I think they should culturally be prepared to lose if necessary to test these things. I think probably in the past, if we are honest, there has been a reluctance to go out there and test it, and people have known that.
Q117 Jack Brereton: On the point that you made, do you think there need to be changes at TPR in the structures and how it operates, or is it more of a cultural issue there that needs to change?
Baroness Drake: They are on a journey themselves, and I think you can see the evidence of that. It is for them to decide their priorities or whatever, but I think culturally, yes, they should embrace the risk of what taking key legal cases means because they will gain more in the end; they will either win or they will learn from their losses and become more efficient. How they would apply that sentiment is for them, it is down to the leadership and the culture, but it is down to the leadership saying, “That is the strategic approach we will take”.
Q118 Steve McCabe: I want to direct my question at Yvonne because it is about the superfund model. I get the impression that the insurance industry is not too keen on it. I see that the ABI described it as “state-encouraged regulatory arbitrage” and as “a bronze standard versus the gold standard of the insurance industry”, so it gives us a kind of inkling of where you are coming from. Could you tell us, in a nutshell, what is wrong with it, what could be done to improve it and what is your alternative for a cost-effective consolidation that would protect members’ interests?
Yvonne Braun: Insurers are the true consolidators here. To give you a sense of the scale of what the insurance sector does—these are the buyout bulk annuity providers—it looks after the benefits of over a million people and liabilities of £80 billion. It has already consolidated 1,200 schemes, and that is a sector that is growing. There are new entrants in it. For the last four years we took on £10 billion a year. This year it is forecast to be about £15 billion. This is a sector that is offering people a near cast-iron certainty of their benefits and ultimately that is what we should first and foremost consider.
The prices for buyouts, as has been talked about, are prohibitively expensive. That reflects a very robust regime put in place by Solvency II, the European regulation, and the Prudential Regulation Authority here, part of the Bank of England, and that reflects ultimately that member benefits are paramount. We have suggested to your sister committee, the Treasury Select Committee, some reforms to that standard because we believe that some of the rules in it are too stringent and lead to the prices being too high. That relates to two specific things around the risk margin and also the assets that can be held to back up these long-term liabilities. We believe that that would lead to some lower prices without diluting the security for the pensioners.
That sort of robust regulation is what I would contrast with what is being proposed here, because ultimately what we are talking about is employers being able to walk away from their pension promise. As the DWP has said, that represents a sea change and is very significant. It is also being proposed that should be regulated by The Pensions Regulator. I think it is fair to say that they have very little expertise of regulating for-profit pension entities. They now have a system in place for a master trust, which is essentially brand new, and untested. Otherwise, they are not used to regulating for-profit entities. That is what the Bank of England, the PRA, do.
I question why we would entrust the supervision and regulation of for-profit entities to TPR and not to the organisation that is already out there, the PRA, which does that every day and has very deep expertise where TPR would have essentially to start from scratch. That is what we mean when we talk about regulatory arbitrage. We should have learned from the financial crisis that it is not a good idea to use gaps in regulation to enable for-profit entities possibly to jeopardise the benefits for scheme members.
Q119 Steve McCabe: Do you fear another pension scandal or disaster with the PPF effectively picking up the tab if this goes wrong?
Yvonne Braun: I think the DWP itself has been very clear that there are potential systemic issues. At the moment it is quite dispersed, isn’t it, because the PPF picks up different employers? If you have a lot of employers concentrated in a superfund and that falls on to the PPF, it could potentially be systemic. That is very different from the situation for insurers because they are backed up by the Financial Services Compensation Scheme, and that pays out 100%. It is very unlikely that an insurer would fail because of the stringent regulation that is in place that I have described.
Q120 Chair: Yvonne, can I invite you to come off it with the first part of your answer? Maybe I have it wrong, but supposing I take a pension out with the Pru and then the Pru decides it is fed up with all this insurance side, it is going to flog this off to somebody who may be totally respectable but is not under the regulatory system of this country. My status, my security has changed, hasn’t it? Although you say all these wonderful funds are covered by the insurance industry, some of them might just get tired, like the Pru, and decide somebody else can do the job. If they are not part of this country, those people’s pensions will not be covered by the protection that they had when they joined the Pru to sign up for a pension.
Yvonne Braun: That is not a luxury that the insurance sector has. If you want to flog your annuity book or whatever, you would have to go through a court process called a Part VII transfer and these liabilities end up with other insurers, and that has happened a few times already. It is not possible to simply move these liabilities over here to a weaker regulatory regime. It is very strictly regulated.
Q121 Chair: When this occurs, when a great insurance company gets tired of doing pensions, the pension guarantee that was always implicitly underpinned by operating with a great insurer is still there?
Yvonne Braun: Correct, because it will have to be transferred and you cannot do that without a court order to be allowed to do it. It is not possible.
Q122 Chair: Very good. That is great news for those, isn’t it?
Yvonne Braun: It is not possible.
Chair: Thank you. We have had a great session, thank you very much. It was really helpful.
Examination of witnesses
Witnesses: Oliver Morley, and Sara Protheroe.
Q123 Chair: Welcome, Oliver. Please introduce yourself and the other member of your team.
Oliver Morley: I am Oliver Morley, the Chief Executive of the PPF.
Sara Protheroe: I am Sara Protheroe, Chief Customer Officer of the PPF.
Chris Stephens: Oliver, the evidence you have submitted floated the option of a comply or explain mechanism for recovery plans. However, The Pensions Regulator seems resistant to that being prescriptive on recovery plan lengths. Do you think a comply or explain mechanism would help bring down the average recovery plan lengths of pension funds?
Oliver Morley: First, I should say, Chair, thank you for having me today. The focus for me is very definitely on the comply or explain element. We need to be able to set a line and from our point of view 10 years seems a rational point to have that line, although the previous speakers implied that 10 years is fairly arbitrary. There are concerns. Again as previous speakers said, we would have concerns about the sudden move to nine years on recovery plans and we would be concerned about an adjustment in terms of the risk on the investment side. We do believe there is a benefit in having a market where you set comply or explain that gives some ability for the regulator to be able to review schemes at some scale. We do believe that making sure that that comply or explain as an obligation is an important part of a possible legislative framework in the future.
Q124 Chris Stephens: I sat in the Carillion inquiry, and we discussed some of that with The Pensions Regulator. Are you aware of any companies that could legitimately have explained why their recovery plan was more than 10 years?
Oliver Morley: To talk about it more generally—maybe Sara would want to give us a specific example—there are obviously circumstances in which a company has a very clear plan to restore that pension from its deficit over time. We can understand why there would be a 10-year context for it in the business’s own investment plans, but it is not a common thing we would expect to see as part of comply or explain. There are situations, yes. Sara, do you have a view on that?
Q125 Chair: Before you do that, Oliver, I was not clear, or maybe I could not hear it properly, on your answer to Chris’s question. Do you think the 10-year rule is adequate or do you think it should be lower? Are you going to push for the 10-year maximum or are you just going to accept it?
Oliver Morley: Obviously, that is the choice of the regulator and DWP as well in terms of how—
Q126 Chair: But it is yours because if they get it wrong it is going to end up in your fund.
Oliver Morley: Ten years in itself, as a single arbitrary figure, cannot be enough. There is a wider set of things—I think you alluded to a dashboard earlier—that we would expect a regulator to look for as red lights, for example maybe excessive dividend payments or dividends from debt. There is a wider set of things. What we were looking for, or at least what my predecessor was looking for, was a clear dividing line, a point where we could at least say, “Here is a way to look at the volume of schemes”, and the regulator could apply resource in a way that made sense. Ten years is not enough by itself.
Q127 Chris Stephens: Are there companies that you think could have explained—as an example, I think it was 16 years that Carillion put forward to The Pensions Regulator? Do you think that there are companies that can legitimately explain that they have recovery plans of more than 10 years?
Oliver Morley: The other thing I would mention about a 16-year plan is that if you are not expecting to make significant payments before a 16-year point and you have a clear plan to do so, that would make sense. Sara, do you a view on that?
Sara Protheroe: I think in general terms the longer the plan, the harder it is to justify. In the commercial world people would struggle to have confidence in a corporate over a more extended time than a 10-year horizon in general terms. When we look at the schemes we are talking about, about a fifth of the schemes have recovery plans currently in excess of 10 years. About 400 of those are in our top two levy bands, so they are very strong employers as assessed by the PPF’s levy methodology. In general terms we would say it would be hard for that group of schemes to justify having recovery plans of that length.
By contrast, there are about 200 schemes in our lowest two levy bands—employers who are under some considerable stress. In those circumstances, possibly some of those could explain a longer recovery plan.
Q128 Chris Stephens: Do you believe that a comply or explain procedure could help bring down the length of these recovery plans, Sara?
Sara Protheroe: Yes.
Q129 Nigel Mills: I am a little concerned about the language we use. I presume when we say, “Could they justify a longer than 10-year recovery plan?” what we think is, “Is there some good reason why they will make so much money over a longer period that they can clear their deficit and just take a bit longer?” In a sense, Sara, what you were suggesting was their justification was, “If you make it less than 10 years we will go bust and you will get nothing”, which is something we were not quite hoping for as to justify or explain. Is that a fair summary of why you said that companies in your weaker two bands could justify a longer than 10-year recovery plan?
Sara Protheroe: I am not necessarily saying they could justify it, but they could perhaps explain it and it might then be a trigger for the regulator to consider potential interventions in relation to those schemes. By contrast, for the schemes you talk about that do have funds available to pay more quickly, we think those schemes that can pay should pay.
Q130 Chair: What are you going to do to make them pay?
Oliver Morley: That is a wider question for the regulator from our point of view. We would wish to see the regulator in a position where it could, at that stage, use its powers to start enforcing on what one would hope as a result of comply or explain would be better evidence.
Q131 Chair: Are you going to make recommendations in private to the regulator that it should use its powers more actively?
Oliver Morley: I am sure we will be talking about the regulator more generally. From even my relatively short experience, I would say the regulator has shown a significant improvement in willingness to get directly involved more robustly. Certainly we would wish to see that and support it throughout.
Q132 Chair: In our previous session, I thought Jeannie gave a wonderfully clear description of a new era we are entering, vis-à-vis occupational pension schemes, where schemes are closed, where drawings on the schemes are increasing because members are now coming in, piling in, properly, to cash in on their retirement promise. Oliver, we have asked your predecessor and he would not budge on this. Do you think your formula is one that is going to see you through how you are going to levy in this new world that Jeannie described to us in the earlier session?
Oliver Morley: I can say I probably will not budge either. One of the things that has impressed me about the PPF is the robustness and quality of the modelling and the investment approach that we take. We are currently forecasting a likelihood of meeting our funding obligations of 93% by 2030. That is a combination of the levy, the assets we take in and the investments we make on those assets. We still have confidence that we will be able to make that.
We have the ability under the legislation to adjust the levy and we would expect to do that if it started looking like there was a chance that we were falling behind on that. There are many circumstances that could lead to that, but almost all of our forecasting at the moment indicates that we are on track to be able to support the obligations we have.
Q133 Chair: So, no increase in the levy?
Oliver Morley: Last year we reduced it and we will have to see where we go in the future. If you look at our PPF 7800 measure, we are seeing—and there was some work this week—the deficit closing again. That is very much subject to market changes. We would not wish pension schemes to be complacent in any way about their deficits, but we are seeing some grounds for optimism more widely and we want that to continue.
Chair: Might we have a note from you, Oliver, which shows how your programming, or whatever the technical term is, is taking account of the fact that we are in a new world of pensions, with the world that Jeannie Drake described to us, and that the let-out clause that you told the Committee—we can put up the levy—might, of course, add to the number of closures of schemes that cannot pay any more? I would love to get that note from you.
Q134 Heidi Allen: Neatly on that point, I think a lot of our inquiry so far has focused on looking at things like Carillion and what happens to the big boys when things go wrong and the PPF kicks in. I was quite struck by a couple of meetings I have had in my constituency with small companies with 100 or 150 employees and the massive effect that the PPF has on them and their ability because they still have old-school DB pension schemes. Three little questions if I may. What advice do you have about how SMEs can access quality actuarial services in simple language? They felt quite bamboozled and almost threatened by actuarial advice that said, “Well, yes, you think your scheme has been fine for all these years but, no, we think it is not. You are in the red now. You need to stump up more cash”. They were terrified and put the cash flow of their business on the line as a consequence.
The second element is a small thing. Even when they change banks, their current account for the business, they are risk banned and their PPF levy can change as a consequence.
The third is a small cash flow question. Can they pay monthly? Do they have to pay in one big annual figure? It does cripple some of the smaller companies that are out there.
Oliver Morley: Would you like to take the first two and then I will have a go at the third?
Q135 Chair: Why don’t you begin with the third one because that is what a lot of companies are watching?
Oliver Morley: I will begin with the third one. I have some experience, given my previous career, in changing payment and collection systems in a significant way. The levy collection process is extremely successful at collecting levy, and that is good news for pensioners and members more widely in that it is quite difficult for schemes to avoid their pension schemes. That is an important part of the PPF’s overall viability in the long term.
Chair: That was not the question that Heidi asked you.
Oliver Morley: I was about to respond. My view is that—I will be very clear on this—changing to a monthly payment system will make that collection rate and the quality of collections more difficult. It will decrease our ability to make sure that we can deliver that on time.
Q136 Heidi Allen: Is that because you think companies will default or—
Oliver Morley: Exactly. My view is that it will be harder for us to collect, and that is one of the things we will have to be able to balance with that. We do provide the option for people to pay in instalments if it is a very difficult time for them, but we believe it is important that schemes are in a position to pay a levy and if they could are not, that in itself is something that would start to worry us.
Q137 Chair: Oliver, come off it. You do not have post office workers knocking on doors saying, “Come on, give us your levy”. People have banking statements and orders to pay the levy. The idea that it is going to be more difficult for you—what about thinking about Heidi’s companies? Which is easier for them—if they pay you 12 times a year or once a year?
Oliver Morley: We do understand the challenges that people have and that is why we try to give them a long lead time on the levy calculation and we are trying to make that longer as well. We have also—
Chair: It is not a question of understanding, Oliver. They understand only too well how it is all worked out.
Q138 Heidi Allen: Some businesses are very seasonal and having a big hit of cash demanded at just the wrong time of year—I was really moved. This is a family business that is hanging on by the coat tails to keep jobs for people and they are doing absolutely the right thing. It just feels that this is working against them and we do not want to lose businesses like that.
Oliver Morley: I think if they come to us and talk to us about a better way of paying, splitting instalments, looking for a longer term we would absolutely listen to them.
Q139 Chair: And after listening?
Oliver Morley: Absolutely. We would be prepared to look at payment on instalments, to look at different schemes. We have also dropped the maximum payout on the scheme to 0.5% from 0.75%. We have been listening to SMEs, and I would want to do so. Having a formal monthly payment available to all I think would be possibly a challenge too far for our ability to collect over the long run. I have some experience on that. It does create some issues with collections.
Q140 Chair: But, Oliver, if we had IPSA that pays our salaries, before us, they could make a case, “It is so much more convenient for us to pay them out annually, never mind about what goes on in between”. We want it monthly. Why can you not respond in a similar way to the companies that Heidi has been talking to? How many SMEs have you spoken to since you have been in office?
Oliver Morley: I have been here for eight weeks and I have spoken to quite a few on the phone now. I have listened to levy payers. I do understand some of their issues. I have to admit that payments did not come into many conversations partly because we are not in payment season at the moment. They were rather more about the level of risk and that kind of thing. Certainly it is something we would look at, but my experience is that it will affect our ability to collect and if we cannot collect it will affect, in the end, our overall ability to make sure that the PPF is properly funded.
Q141 Heidi Allen: Would you commit at least to ensuring that there is an easier mechanism for these businesses to have a proper dialogue with you when they are struggling, rather than just being told “computer says no”?
Oliver Morley: Yes, absolutely. We can definitely look at that and I would be happy to describe that process.
Q142 Chair: We will probably bring Sara in. I feel there is a recommendation coming up from the Committee on this, so maybe you will get working on it.
Oliver Morley: We will take that, but depending on the recommendation we will keep a very close eye on what happens to collections.
Heidi Allen: Yes, of course.
Q143 Nigel Mills: I wondered about accelerating payments or deferring them. Presumably the happy medium is a few earlier and a few later, but I am not sure it would help any SMEs to be paying early.
Heidi Allen: Or even quarterly or just something that will help soften the blow a little bit.
Nigel Mills: Presumably somebody could pay early. If they wanted to pay in instalments and start earlier, you would happily take the cash.
Chair: The system might like that.
Oliver Morley: It is not really a question of the system. It is much more a question of making sure that we can provide people with clarity about scheme funding more generally. We try to tell people early, try to give them plenty of lead time to be able to pay, and that is what we would rather do.
Q144 Chair: Can you still remember, Sara, the other questions that Heidi asked, because I can’t?
Sara Protheroe: I will be honest I have been playing them over in my mind. I think I still have them.
Q145 Heidi Allen: It is little things that affect their risk, like even changing their bank account, and there was the general question about actuarial advice because it is complicated. Actuaries are bright people, and our little companies are having to learn to be smart actuaries and they do not have that skillset. They are busy manufacturing or doing whatever they are doing.
Sara Protheroe: Understood. On your first point about access to quality advice, this is possibly somewhere that the consolidation, which is another theme of the White Paper, might come in. The DB universe is highly fragmented. Small and medium-sized employers are very common in the DB universe; 35% of schemes have fewer than 100 members so this is a real issue. Bringing schemes together gives the potential to access high-quality advice more cost-effectively, so I think that could be part of the answer there.
On the levy framework and how we are trying to make things easier for small and medium-sized employers, Oliver already spoke about how we had changed the maximum amount that a scheme can pay. We have also made sure that when we are looking at the insolvency risk of employers we do not judge small and medium-sized employers on the same scorecard as we judge the largest employers. Following feedback from small and medium-sized employers, we have made it easier for small and medium-sized employers to tell us about the deficit reduction contributions that they are making. We are constantly looking for ways to make it easier for precisely the kind of businesses that you are talking about because we do recognise the challenges that they face.
Q146 Heidi Allen: Given that you say there are that many percentage-wise of this small size, how do you engage with them? Do you meet them six-monthly? Do you have roundtables with SMEs to hear about their issues? Is that something you could set up, because I have some volunteers for you. Is it something you do?
Oliver Morley: We have a fairly continuing process. I listen in to calls so I am hearing the levy payers from that point of view. I will be spending quite a lot of time anyway with levy payers over the coming few months just to get out and understand some of these issues. Of course, it is important that I get as much of the large employers’ views as I do the SMEs in that discussion.
Q147 Chair: This will be meeting them, will it, not over the phone? There will be meetings?
Oliver Morley: There will. Generally, I do. I do get out and see people. That tends to be the way I operate. I would hope to spend some time. We also have our wider consultation that takes place on a three-year basis, which is effectively just kicking off at the moment. It is very important to us that through that levy consultation we get a wide scope of views and that is very much physical meeting.
Q148 Nigel Mills: We have lots of ways of trying to work out what the scheme’s liabilities and deficits are. I think there is the accounting one. There is the buyout one that probably tends to be highest. Then I think you have a calculation of your own. Do you have any views on which ones should be used and for what? Should we require trustees to calculate them all every so often or is there some other approach you would like?
Sara Protheroe: As you have identified, there are many and varied ways of measuring a scheme’s liabilities and ultimately it is about the degree of confidence that people have that members’ benefits will ultimately be paid. We think it is right that the scheme funding regime has flexibilities in it to recognise the particular circumstances of schemes and employers. At times we think that those flexibilities have perhaps been overused, so we welcome the fact that in the White Paper the regulator will be looking to develop a new DB funding code of practice with some legislative underpin to set some firmer rules.
As you pointed out for us, within the PPF we look at the section 179 measure of liabilities, which is the cost of buying out PPF levels of compensation from an insurer. That means that we can look at our risk exposure in a consistent way across all schemes. We find that helpful. We suspect that for schemes generally as they are looking to the long term, particularly as they are maturing, it would be helpful to have a greater regard perhaps to that section 179 measure and how they are doing relative to PPF funding levels. We note that at the moment three out of five schemes have technical provisions below the level that would be required to meet PPF benefits, and that the balance perhaps needs to shift somewhat.
Q149 Nigel Mills: Are you thinking of some sort of requirement when they do their triennial valuation to publish that section 179 measure and their compliance with it? Would that help you in landscape reviewing?
Sara Protheroe: We have access to that information as it stands in order to calculate our levies annually. I think it is more about how the trustees look at that information alongside their scheme’s specific funding data and think about the long-term future of their scheme.
Q150 Chair: When you said three out of five, Sara, what did you mean by that? Is it technical stuff you were talking about?
Sara Protheroe: Literally of every five schemes, the technical provisions of three of them would not take them up to a PPF level of funding over the long term.
Q151 Chair: What do you mean by technical provisions?
Sara Protheroe: Their target, effectively. They are not targeting necessarily ever to get to a PPF level of funding.
Q152 Chair: They are not making adequate monthly contributions to their pension scheme to meet—
Sara Protheroe: Arguably.
Q153 Steve McCabe: You will have heard that I asked about the superfund model earlier, and I want to come back to that. Why should a scheme like the pension superfund be eligible for PPF protection and why should the PPF and people paying the levy be effectively underwriting what is a commercial profitmaking venture?
Oliver Morley: That is a good question.
Steve McCabe: Give us a good answer.
Oliver Morley: To a certain extent the way a superfund was designed could effectively mean that it was almost automatically legally compliant with the legislation and would be eligible for PPF funding. I think there is a wider White Paper consideration around whether a consolidator is eligible for PPF funding. Assuming it is, we would want to make sure that the levy that was applied reflected the level of risk, and collect accordingly. We would hope and expect that the regulator was focused on ensuring there was a very strong funding covenant—going back to the Chair’s point earlier—which had, to a certain degree, some of the legal protections that you might, for example, have for an insurance buyout. The White Paper will need to take into account that kind of regulatory playing field discussion. From our point of view, if it is eligible for the PPF we will want to make sure that the levy reflects the risk.
Q154 Chair: But in the insurance industry we have seen this activity going on, haven’t we, consolidation all under the guise of, “It will be more efficient, more profitable”? Then once the person doing the consolidation has the wonderful slug of money out of the scheme, the scheme is sold on. How are you going to go after these sorts of characters who operate in the pensions area as they are starting to do?
Oliver Morley: It goes back to the question of the strength of that funding covenant, both in law and more generally. I think it is very important, where assurances have been given by a pension superfund or a consolidator, that they will fund the scheme properly under all circumstances, even, for example, if their investment plans do not work out. That should be a very clear and strong funding covenant and if necessary protected by the legislation and regulations more generally.
Q155 Steve McCabe: When do you expect to be discussing this with the regulator? Your answer is, “This is about making sure we have made the right judgment and that the scheme is being properly evaluated and the levy has been set”. When will all this start to happen?
Oliver Morley: We are currently engaged. It is not just about the regulator. It is also about the Government’s decision on this. They have set out a way for consolidators potentially to operate in the White Paper, but I still think there is quite a lot of discussion about the kind of legislative controls that would be needed to make sure that those superfunds were protecting the rights of pensioners, which from a PPF point of view is the most important part for us.
Q156 Steve McCabe: I got the impression that the answer from the insurance industry was that they fear that this may become a vehicle for sponsors to jettison their pension liabilities at a lower cost than a buyout and the risk is that if it goes wrong it will be the PPF and the regulator who have to pick up the fallout. Are you at all worried that is where you might be heading?
Oliver Morley: We are concerned that the right protections are in place for that funding covenant. That is probably the best way to argue on it. Yes, clearly. It is very important to us that this is not an opportunity for schemes simply to transfer risk on to pensioners and the PPF. We want to make sure that that risk is shared in the right way.
Q157 Chair: We do not want the names of the companies but might you give us, Oliver, some examples of where you have entered into these negotiations that have just been raised, where you have checked through that you are happy that the guarantees can be delivered when there are these consolidations?
Oliver Morley: I do not think there are many consolidations. We have not been in a position where we have been involved in a consolidation.
Sara Protheroe: We have discussed in general terms the propositions of the two consolidators that we are aware of in the marketplace at present. The focus of that has mainly been to be sure that we could impose an appropriate risk-based levy charge once one of those consolidators becomes eligible for PPF protection, but those discussions are ongoing.
Q158 Chair: Might you report to us, just literally following through Steve’s question, which is immensely important, about how you are ensuring that the risk is not like the magic parcel? It is going to somehow stop somewhere when the music stops and you just hope they can pay. Not now; we would like a written note from you. Is that all right?
Oliver Morley: Yes, absolutely.
Chair: That would be really good, thank you.
Q159 Jack Brereton: Our report on British Steel has identified a surge in the number of transfers out of DB schemes. Often that is to schemes that will be much poorer for those individuals, and also they may lose their entitlement to many of the protections offered by PPF. What do you think should be done to make sure that those individuals in the scheme are much more aware about protections that they currently have and the fact that they may be threatened by transferring it?
Oliver Morley: In the case of British Steel it was important for us to ensure that pensioners understood about opportunities more generally. I think there is a wider question about how we communicate on the benefit of the PPF underpin. Sara, I am not sure if you have a view specifically on that area.
Sara Protheroe: I think we all have a part to play in ensuring that people understand the value of the PPF safety net, the strength of the compensation we provide and the fact that it will be financially sustainable over the long term to meet our obligations. More generally, we find it helpful, as the PPF, to share our evidence and our modelling that suggests that over time schemes will generally be able to pay out member benefits in full. So it will be a minority of cases that end up falling to the PPF. We are looking to play our part in that ongoing dialogue, increasing awareness for members and people more generally, and we would welcome others contributing to that effort as well.
Q160 Jack Brereton: How aware do you think people are of PPF and what more are you planning to do to make sure that awareness increases?
Oliver Morley: One of the challenges for me and my arrival is to think more proactively about how we communicate that benefit more generally, to make some of the modelling more accessible and easy to use for pensioners. It is a complicated area. We need to be able to provide them with information that allows them to compare against the offer that the PPF provides, so that for those kind of future situations they would be able to very quickly understand some of the differences. Certainly that is an agenda for me on my arrival.
Q161 Jack Brereton: Do you think there is a role for other key partners besides yourselves to improve that awareness and ensure that there is more information out there about the protections that can be offered?
Oliver Morley: Yes, absolutely. It is not just about the regulator. It is also about the new advisory body, making sure that we can get that advice to people. In some ways, the PPF represents a benchmark for defined benefit pensions and we need to be able to help people compare against that benchmark.
Q162 Ruth George: Oliver, your predecessor told us in a previous session that DB pensions are now entering the endgame. Do you agree with that assessment and what would the endgame look like?
Oliver Morley: I am not sure I entirely agree with the endgame terminology.
Chair: They will see you out, Oliver. Don’t worry about that.
Oliver Morley: Exactly.
Chair: It is a long process.
Oliver Morley: It is. When we started we had about 7,800 DB schemes and now we have about 5,600. That is a still long way to go before defined benefit schemes, as an approach, close. Around 12% are still open for new members, so I think we will be here for a long time talking about defined benefit pension schemes.
Q163 Ruth George: Why is there a funding horizon of 2030 then? Don’t you think that will accelerate?
Oliver Morley: By 2030 we intend to be in a position where the levy is only applying to new members of DB schemes or people who have joined more recently. We are in a position where effectively the PPF as a whole is largely self-funding. It does not mean there will not be a levy. It just means the levy will, by that stage, be de minimis. It will be much more around the risk inherent in having new schemes. That was always the approach that the PPF took on 2030 and I still think it is the prudent approach. It is the right one to take.
Q164 Chair: A bit like Mr Gladstone who promised that income tax was temporary, your levy is temporary, Oliver, is it?
Oliver Morley: No, I think the levy will certainly be there for the foreseeable future. Even after 2030 it would still be around, but it would be much reduced by that stage.
Q165 Ruth George: Do you think that the White Paper goes far enough in managing the risks to members during this next decade?
Oliver Morley: In a way there are two questions. There is a PPF risk. From a PPF point of view, the White Paper does go sufficiently far in ensuring that the risk to the PPF is low. In all our modelling and forecasting—I have taken this further since I joined—we do look at scenarios of big claims, for example such as Carillion or BHS. We do not know where they will come from, but we do fully understand that big claims will be made on the PPF. Over time, as our assets grow, our investment strategy pays off and we have the levy; each of those claims has a lower impact on the PPF as a whole. That was the way we were configured for the beginning and certainly is the way we will be configured into the future. The PPF risk is low.
On the wider question of the risk for pensioners in DB schemes, the White Paper intends to minimise or reduce that risk. It will not be able to remove it entirely, but we are supportive of it and we would like to see the regulator be able to use its powers well to reduce that risk.
Q166 Chair: We are all sailing happily into a beautiful sunset with this model, are we, Oliver?
Oliver Morley: I would put it a different way. We are confident but not complacent. We work hard to make sure that our modelling and our approach on member funding for the PPF is correct and very prudent. My experience over the short time I have been with the PPF would indicate that prudency is pretty much our watchword.
Chair: Very good. Thank you very much for the session. I am sure it is the first of many happy meetings that we will have with you, Oliver. Thank you very much, and Sara.