Work and Pensions Committee
Oral evidence: The work of The Pensions Regulator, HC 2092
Wednesday 26 June 2019
Ordered by the House of Commons to be published on 26 June 2019.
Members present: Frank Field (Chair); Rosie Duffield; Ruth George; Steve McCabe; Nigel Mills; Chris Stephens; Derek Thomas.
Questions 1 - 97
Witness
I: Charles Counsell, Chief Executive, The Pensions Regulator.
Charles Counsell
Q1 Chair: Might you introduce yourself for the sake of the record and then Nigel will begin our questioning?
Charles Counsell: Yes. I am Charles Counsell. I am the Chief Executive of the Pensions Regulator.
Q2 Nigel Mills: Good morning, Charles. Perhaps you could just start by telling us what you see as your priorities in your new role.
Charles Counsell: Yes, thank you and thank you for inviting me here today. May I start by welcoming and thanking the Committee for its scrutiny of businesses of pension schemes and of course of us, the Regulator? I look forward to working with you over the coming years.
In terms of my priorities, if I may set those out both in the shorter term and in the longer term. In the shorter term, my priorities are delivery of change, my team, and a real focus on the saver. Let me explain each of those. My background is in delivering change. The Committee will be aware that before I took on this role, and after a brief spell as Chief Executive of the Money Advice Service, I led the implementation of automatic enrolment for the Pensions Regulator. That was a massive change programme leading to 10 million more people saving into pensions than before; a massive change programme for employers, for the industry but also for the Pensions Regulator.
Coming back into the Pensions Regulator as Chief Executive, I am committed to the delivery of change within the Regulator. My predecessor, Lesley Titcomb, set up a programme of change called TPR Future, where we will be clearer, quicker and tougher, and I am committed to seeing through that programme of change. Of course, there are other things that we must change during the course of this year. Some are underway, such as the regulation of master trusts and the master trust authorisation process. In my previous role I called for the better regulation of master trusts, recognising the potential risks absent that regulation.
What does that mean in practice? That means that this year, as well as master trust authorisation and the ongoing supervision of master trusts, we will be supervising 1,200 or more schemes. We will have a real focus on those schemes, both in terms of one-to-one supervision but also in terms of specific regulatory initiatives that we will deliver. Examples of that will be: we will be looking at default investments; in some schemes we will look at recovery plan lengths; and we will be looking at the balance and the fair treatment of pensioners with respect to the dividends that are being paid.
If I might move on to my team: change is difficult and my team has been through very significant change. When I joined the Regulator as Chief Executive, one of the first things I did was quite literally go desk by desk to meet each member of the team, to talk to them about what they were doing and to introduce myself and for them to introduce themselves. I was struck when I did that—not surprised by the dedication and the passion that they have for what we do—by how much the clearer, quicker, tougher mantra was now part of what they do as well. I am conscious that change is something that takes time, so I remain absolutely determined to deliver that change to make sure we do not go back to the ways of working that we had before.
Q3 Nigel Mills: The change plan that Lesley put in place is the right one and you have not been tempted to tweak it, extend it, roll it back or anything, you are going ahead as planned?
Charles Counsell: I have no intention of rolling it back. I think it is the right programme for the time. In that respect, I will absolutely see it through. To that effect, and joining in April, I have completed the internal reorganisation of our teams, which are now focused on supervision and enforcement, and we will deliver the regulatory initiatives that I talked about before.
Look, I think I would go further, and if I may pick up on the saver point, there has been a major change in the demographics of saving into pensions because of automatic enrolment—many more young people and many more lower-paid people saving into pensions, and of course saving typically into DC pensions where the risk sits on the person and not on the employer. In that respect, we absolutely must have a relentless focus on looking after the saver and giving them confidence that where their money is placed represents good value for money.
That does bring me on to the longer term, if I may, because thinking to the longer term there will be people this month, people today, turning 22 who will be automatically enrolled into a pension scheme for the very first time. That money will sit in a pension scheme for 40 or more years and it is absolutely our duty to make sure that we look after their interests and we look after where that money is invested, so that they end up with a good standard of living in their retirement.
In that respect, looking at master trusts, we need to move further. I think we need to look at how master trusts are offering value for money. We need to look at DB schemes and look at the long term for these DB schemes, making sure that they have clear views about the long-term outcomes, the long-term objectives that they have, into which we can contextualise the shorter-term recovery plans.
Q4 Nigel Mills: Is there a long-term future for defined benefit pensions or is it just going to be a runoff of the ones we have and then a final end?
Charles Counsell: Typically, there has been a long-term decline in the number of members in DB schemes and I do not expect that to reverse. That said, of course, DB schemes do represent good value for members when they get their benefits, and so in that respect DB schemes are absolutely to be encouraged. But I have to recognise the long-term decline and it is very unlikely that an employer would set up a new DB scheme from the state.
Q5 Nigel Mills: That is not what you are aiming to find a solution to achieve. Could you just tell me quickly how many people do you have working on DB schemes and how many on an auto-enrol master trust kind of scheme?
Charles Counsell: Yes. May I just refer to my numbers? On automatic enrolment we have about 150 people. In our frontline regulation we have about 180 people. That is not to say that that is the entirety of people working on frontline activities. We also have a communication team. Communications represents a significant part of what we do in terms of delivering regulation. Then of course we have advisory teams, lawyers, actuaries, business analysts and policy teams, all of whom also contribute to the total. In total it is about 65% of our staff.
Q6 Nigel Mills: That was 180 frontline. How many of those are working on DB schemes and how many are on auto enrolment master trusts?
Charles Counsell: Automatic enrolment is 150 separated from the 180.
Q7 Nigel Mills: They are quite even in terms of your staffing levels?
Charles Counsell: The enrolment and, yes, on the frontline regulation.
Q8 Nigel Mills: If I asked you what kept you up at night, what is the sort of single biggest issue that you are worried about for next year in your landscape?
Charles Counsell: It will come as no surprise that in the shorter term the active cases that we are involved in are at the top of my attention. I am sure we will come on to talk about Arcadia in a few minutes.
In terms of other things that worry me, I have talked already about my team and making sure that my team are able to go through the changes that we are putting through. I am also conscious that the Government at the moment are looking at a Spending Review and there is pressure everywhere in Government on spending. At this time, when we are being asked to do more and indeed given more things to do, I worry that that Spending Review may lead to reductions in our funding and I am not sure that that is right at this particular point in time.
More broadly, I have already mentioned value for money and my biggest concern is being able to demonstrate to savers that schemes are offering value for money when they put their money into schemes.
Q9 Nigel Mills: Just as a last one, are you like two different organisations in the same body? You say you had to go round and introduce yourself to a whole load of your colleagues, but you were only away from the TPR for just under two years or something. It is as if you did not know them or what they were doing when you got back. Is there any synergy between your team and the DB team or are you like two ships that pass in the night?
Charles Counsell: No. There absolutely is synergy between them. In that respect—just going back to meeting people in my first couple of weeks—I wanted to introduce myself to the people that I clearly did know and I wanted to introduce myself to some people that I did not know. The organisation has grown over the period from about 550 to 700 people. Also, I did want to get a sense of what had changed in the period while I was away, what was different. It is easy to come back and make assumptions about what the organisation does that may not be true and, therefore, it is important to test those assumptions.
In terms of synergies between automatic enrolments and what we do in the rest of the organisation, yes, I think there are significant synergies. In many ways what we were doing with automatic enrolment is the forebear of what we are now doing through the change programme that we are going through. In automatic enrolment we were clear with employers about what we expected of them. We set out to them and to their advisers what we expected.
We were quick to act when we found things wrong. We did not allow any time to go past once we were clear that an employer had not automatically enrolled their staff or had not put the contributions into pension schemes. We have been tough with them. We have fined them where we have needed to—where we found things have gone wrong—and we have been tough in terms of how we have gone about pursuing the most egregious examples. For instance, we secured a custodial sentence against one employer for deliberately opting people out of the pension scheme. That was a custodial case that was started on my previous watch and was one of the first custodial cases we took.
Q10 Chair: Very good. Can we turn to the Arcadia Schemes, Charles? How many staff do you have working on the Arcadia brief?
Charles Counsell: I am not sure I know that number precisely. We have a number of people from across the organisation who are involved in the Arcadia discussions, but I am afraid I do not know the precise number.
Q11 Chair: Can you take us through the different stages because you—like us, and more so the workers and pensioners—do not want a BHS outcome on this? Could you report to the Committee what has been happening to the assets the Arcadia Schemes have as a proportion of the pension promises, the liabilities, which those schemes have incurred?
Charles Counsell: Yes. This has been a delicate and difficult case. I would say it remains sensitive because, of course, we are still in the period of when the CVA could be appealed, so within a 28-day period. The Committee will also be aware that there are things that I am restricted from saying by the law.
Let me take you through the timeline of what has happened in recent negotiations. My team became aware of the potential for a CVA and at that point—
Q12 Chair: When was that, Charles, that you became aware?
Charles Counsell: We started to engage with the trustees in February. We became aware that it was a potential before that, but we engaged with the trustees when it became clear that this was quite a high likelihood.
Q13 Chair: You initiated it or did the Trustees?
Charles Counsell: I was not there at that particular time—I re-joined in April—so I am afraid I cannot answer that question. What I do know is that when I did come in, as you would expect, this has been one of my very top priorities going through this negotiation. It has been delicate because on the one hand we absolutely want to secure the best possible deal for pension savers, but equally we recognise that an ongoing sustainable employer gives the best opportunity for that and there are 18,000 jobs at stake through this negotiation.
Q14 Chair: Sure. Can I bring you back to the question, which was: what is the pattern of the assets that the Arcadia Schemes have to liabilities, please?
Charles Counsell: There is a deficit in the pension scheme and the size of that deficit I am not able to talk about, but if I may talk about deficits in principle, there are—
Q15 Chair: If you not able to talk about it, why?
Charles Counsell: Because it is restricted information in terms of saying exactly the level of the deficit.
Q16 Chair: That has been restricted by whom?
Charles Counsell: It is restricted in the law.
Q17 Chair: That you cannot talk about it?
Charles Counsell: I cannot talk about that, no.
Q18 Chair: All right. Would the trend be that there has been a growing deficit in assets as opposed to promises?
Charles Counsell: In this scheme it has both gone up and gone down over a period of time. The latest valuation is due relatively soon, and it would be for the trustees to set out that valuation because it is their valuation.
Q19 Chair: You have a figure, Charles, when you are negotiating with the Arcadia company, you are trying to get an agreement done with assets but you are not able to say what the deficit is to us?
Charles Counsell: No, I cannot. The figure that we are focused on is what is called technical provisions, which is the level of funding that is required in order that the scheme can become self-sufficient. That is not the insurance buy-out figure, which is inevitably a higher number. The figure that we are focused on is the technical provisions that, as I say, ensure that the scheme can be self-funding.
Q20 Chair: Can you tell us about the assets or the guarantees that you require to meet that figure?
Charles Counsell: Yes. The deal that we have concluded is one where we have £210 million of security over various assets. In terms of precisely what those assets are, once again I am restricted in what I can say to this Committee. I am genuinely frustrated that I cannot say it but I cannot.
In addition to that—subject to the CVA of course being successful, which is an important point—we have £100 million that will go into the scheme in cash from Lady Tina Green. Then there is an additional amount of £165 million deficit repair contributions over the next years that will go into the scheme, making a total of £475 million. For me, what that does do is give a good outcome for the members of the schemes and it does set the scheme on the flight path to being self-sustainable.
Q21 Chair: If something went wrong with the promise from Lady Green, do you have the powers to acquire assets from her even though she is living abroad and not a British taxpayer?
Charles Counsell: Yes. The most important thing, first of all, is that the CVA goes through so that this deal is secured. Then, subject to that, yes, we are able to go across jurisdictions to secure money where we need to. Indeed, we have done that before. There was a historical case where we pursued money in Russia and secured money back into the scheme.
Q22 Chair: Of the securities you have, can you say how much of that is in Arcadia property?
Charles Counsell: Again, I am not able to say the precise amounts but a significant proportion of it is in Arcadia property.
Q23 Chair: A significant proportion?
Charles Counsell: Yes.
Q24 Chair: Even though Leonard Green, who bought a quarter of Arcadia, sold his share back for a dollar, suggesting he did not value the organisation very highly.
Charles Counsell: What he sold back was a part of the group, not—
Chair: A quarter of it, yes.
Charles Counsell: A distinct part, a subset of the group, and whether his stake had value is not relevant to the security that we have over any of the properties.
Q25 Chair: Can I ask one last question and then move back to Nigel? Do you think the trustees of the various pension schemes are up to the standard you would like them to be?
Charles Counsell: Yes, I do. Since I have been in the post we have worked closely with the trustees. They have negotiated robustly along with us, both with the employer and with the shareholders, so, yes, I absolutely do think they are and we have been as one in terms of getting a good outcome for members.
Q26 Chair: Sir Philip Green, who was before us, described that they were “asleep at the wheel”. You have woken them up, have you?
Charles Counsell: I am not familiar with that quote so I am afraid I cannot comment on that.
Q27 Nigel Mills: In the last numbers I have seen there are about 3,449 defined benefit schemes in deficit, which is a pretty high proportion of around 5,500 schemes in total. How many of those are you worried about might need some sort of intervention and how many do you think will get back on an even keel at some point?
Charles Counsell: Those numbers are about right. About 75% to 77% of schemes are currently in deficit. In many ways I worry about any scheme that has a deficit, because ultimately we want all schemes to be able to pay full benefits to members. Equally, I recognise that it takes time for employers to fully fund schemes and that is the way that the legislation is set out.
In terms of the ones that we worry about, we have two watch lists that we keep a very careful eye on: a short-term and a long-term watch list. Those are the ones that we pay particular attention to but I would say that we live in a volatile world.
Q28 Nigel Mills: How many schemes are roughly on each of those?
Charles Counsell: There are about 50 in total on the two of them, 20 on one and 30 on the other. As I say, we do live in a volatile world so these do change. We are constantly reviewing the watch lists and just because that is the 50, it is not that we don’t look below the 50 at the ones that are bubbling under that.
Q29 Nigel Mills: If we asked the Pension Protection Fund what it thought, would it be saying much the same thing? That those would be the level of schemes that the Fund would be worried about and would be about to take responsibility for? Is that an assessment you share with the Fund?
Charles Counsell: Yes, it is. First of all, I meet regularly with the Pension Protection Fund to discuss these matters. The watch lists are shared between us and we do share intelligence, so, yes, the Fund would absolutely recognise it.
Q30 Nigel Mills: When you meet with the Fund is it pleased with the performance of your organisation? Does it say, “For God’s sake, get a grip, we don’t want to end up with all these pension schemes. Can’t you get them sorted out for us?”? They are like your failure fund, aren’t they?
Charles Counsell: I am sorry, could you just repeat that?
Q31 Nigel Mills: The Pension Protection Fund is there if you fail or the trustees that you are regulating fail. The Fund then gets to pick up the pieces, so I suppose it has a big interest in you doing your job well.
Charles Counsell: Absolutely, it does. Of course, we have an objective to protect the PPF. The Pension Protection Fund is also there because businesses sometimes fail; whatever anyone does some businesses will fail. You would have to ask the Fund but I think it would say that we do a good job. I sit as a guest on its board. It sits as a guest on our board. We are, therefore, fully sighted on the issues that we are both tackling and we have normally shared interests. Clearly, we have different objectives.
Q32 Nigel Mills: You did not have a full and frank exchange in your first meeting where you were told, “For God’s sake get a grip,” or anything? It is all much more constructive than that at least.
Charles Counsell: It is much more constructive than that.
Q33 Nigel Mills: Does the Department agree that you work together well and that is an arrangement that works?
Charles Counsell: That we work together well with the Department or with the PPF?
Q34 Nigel Mills: With both, I guess.
Charles Counsell: I believe so, yes. We have recently been through what is called a tailored review—and that has been published—and that is a periodic review of the operation of the Pensions Regulator. The conclusion of that review is sponsored by the Department and the conclusion of that review is that we are a well-run organisation. It makes a number of recommendations, which we have accepted, both to ourselves and to the Department. Yes, I think that the Department would say that and we certainly work very closely with it on a number of matters, from policy through to scheme risks.
Q35 Derek Thomas: Good morning, Charles. If you take the tension between dividends and pension deficits, what is your position on whether a company should pay dividends if it has or when it has a pension deficit?
Charles Counsell: For the first time, we set out in our annual funding statement this year a very clear statement about our views on when it was appropriate for companies to pay dividends and where there is a weak employer that cannot support the scheme we do not expect that company to pay dividends. Where there is—
Q36 Chair: Charles, can you tell us, what is the definition of a “weak employer”?
Charles Counsell: It is one that is struggling to survive. We have another definition, which is “tending to weak”, which is one that has the risk of struggling to survive. In those circumstances, where it is weak or tending to weak, we expect the contributions to the pension scheme to be greater than dividends unless the recovery plan is very short.
Where it is a strong employer, we expect it to be putting substantial payments into the pension scheme to reduce the recovery plan over a period of time. We have set out that guidance. We will be following up with 150 pension schemes over the course of this year to make sure they are following our expectations in this regard, and where they are not we may take action.
Q37 Derek Thomas: Just bear with me. If you have an endowment plan—as I do—I get letters saying, “You are not going to meet this. You need to look at how you are going to reach that target”. Do you do a similar thing with a company if it demonstrates it has a pension deficit? Do you write to it and say, “Please show us your plans on how you are going to put the right kind of cash in that that is going to reduce that deficit”?
Charles Counsell: Yes, we do. Every three years each scheme must set out its valuation. That valuation is of assets and of liabilities, and we set out clear expectations of how it should carry out that valuation. Then we review that valuation. In some cases we will be actively engaged in the process of that valuation where we have concerns.
Derek Thomas: Thank you very much. I think you have answered the second question.
Q38 Chris Stephens: For those us who were on the Carillion inquiry, Charles, would Carillion have been identified as a weak employer or a tending to weak employer, and are there clear lessons that the Pension Regulator needs to learn as a result of what happened with Carillion? Because it is quite clear to me—someone who was in that inquiry—that the shareholders were given far greater priority than addressing the pension scheme issues.
Charles Counsell: If I look at the early period of Carillion, 2011 to 2014, it is fair to say that we were working in a very different environment than we are working in now. It was a point at which there was a huge focus on the recovery of the UK economy. There was a lot of pressure on us to take into account the health of the sponsoring employer. That led to the new objective that we have, which is exactly that, to take into account the sustainable growth of the employer.
The sort of processes that we have in place now, in all honesty, we did not have in place then but we do have them in place now. The idea that we would look at the strength of an employer and that would define for us the degree to which we thought it was fair that dividends were paid is not something that we did at that time. We do do it now and things have changed. Since Carillion there are lessons to be learnt and it is things like this that are exactly those sorts of lessons.
Q39 Chair: Charles, you said, “There was a lot of pressure on us”. Who put the pressure on you?
Charles Counsell: It was from a number of places. I think it is matter of public record that the CBI and the Treasury were very keen to make sure that we did not jeopardise the sustainability of employers. Of course, that led to the objective that we were given in 2014 to make sure that we took into account the sustainable growth of an employer.
Q40 Chair: Their hands are dirty in respect to the Carillion scheme that Chris was talking about?
Charles Counsell: Clearly, they were talking about it from a general point of view. You must look at the sustainable growth of employers. They would have had no involvement in the individual case that we are talking about, but more generally they were and that led to us having an objective for DB funding, an objective to look after the sustainable growth of an employer.
Q41 Chair: Therefore, you were not independent in this instance?
Charles Counsell: No, I would not say that. We were independent but we were asked to consider the sustainable growth. In 2014 we were given that specific statutory objective and, in everything that we do, we must take into account our statutory objectives.
Q42 Steve McCabe: The Pension Protection Fund told this Committee, when we were doing the Defined Benefits White Paper inquiry, that the ratio of deficit reduction contributions to dividend payments had declined from about 10% in 2011 to about 7% by 2017. That was largely because of increased dividend payments. What is the ratio now?
Charles Counsell: I think the ratio is roughly that.
Q43 Steve McCabe: It is still about 7%.
Charles Counsell: It is still higher than it was. So yes, that is right. I think it was 1:14, so that is right, about 7%. That is exactly why we need to be focused on this area, I agree. Pensions, pension savers, must be treated fairly by their employer. It is just not right that employers are disregarding pension savers when they have an obligation and they have made a promise to those pensioners, so yes, I agree that we must take that into account.
Q44 Nigel Mills: Are you happy about the way companies are disclosing what reserves they have available to pay a dividend is accurate? I think there has been some question around whether some people are not quite disclosing everything as perfectly as they should do, and that is allowing them to pay dividend they cannot afford. Have you looked at that question?
Charles Counsell: Not personally. It is not our area of expertise, but I am conscious that there is an ongoing inquiry because of Carillion. There is an ongoing inquiry into exactly that, but it is not our area of expertise.
Q45 Nigel Mills: Can I ask you about the Railways Pension Scheme, I almost fear to tread there? Obviously, it is causing some issues with rail franchising—exactly what the level of liability is and who takes it on. I think one of the operators thought the deficit that may exist was about £6 billion and other people have different estimates. Is that an issue of quite the scale it seems to be or is there some misunderstanding of exactly where all this liability rests?
Charles Counsell: For the same reasons as before, I cannot comment on the actual deficit. Suffice it to say, the railways scheme is an important scheme with a lot of members who are affected by the potential of a deficit.
We have had our focus on this for some time. We took specific action against one rail operating company, precisely because of the balance between dividend payments and contributions to the pension scheme. We issued a warning notice. That action led to the current talks that are underway between the train operating companies, the Department for Transport, the trustees and others about what a long-term solution for this scheme is. We remain very actively involved in those discussions and I sincerely hope that there will be an outcome to those discussions later this year.
Q46 Nigel Mills: Is one of those potential outcomes a Government guarantee of the scheme or is that a pie in the sky option?
Charles Counsell: That is one you would need to put to the Department for Transport.
Q47 Nigel Mills: Presumably, the only other options are that the train operating companies have to pay more. There is nobody else, is there?
Charles Counsell: What is undoubtedly true is that this is complicated. The arrangements for the train operating companies were that any contributions that they make, if there is an increase, there is a proportional increase on the members of the scheme, the employees. That makes it complicated but we must find a solution to this going forward.
Q48 Nigel Mills: Will that solution be a public one that you could share with us?
Charles Counsell: I hope so.
Nigel Mills: That is the best we can do.
Q49 Chair: This scheme is on your watch list, is it?
Charles Counsell: Yes.
Q50 Chair: When did it come on your watch list?
Charles Counsell: I cannot answer that. I do not know how long it has been on the watch list.
Q51 Chair: Will you write to us on that?
Charles Counsell: I am certainly happy to write to you.
Q52 Steve McCabe: I want to ask about the new powers that you are going to be given in terms of making it a criminal offence for people with gross reckless behaviour in relation to a pension scheme. I think the Government are suggesting that there could be a maximum prison sentence of seven years or an unlimited fine. If you had those powers in the past, can you give me an example of a situation that the TPR has dealt with where you might have had a better result if you could have used those powers?
Charles Counsell: It is difficult to know retrospectively whether it would have made a difference. We have looked at some historical cases. There is one in particular where we think there was evidence that could have been pursued of a reckless—
Q53 Steve McCabe: What was that?
Charles Counsell: I am afraid I cannot give you the name of the scheme. There was—
Q54 Chair: Would our guess be right on what scheme that is?
Charles Counsell: I do not know what your guess is.
Q55 Steve McCabe: There was a scheme where you thought you could have used it?
Charles Counsell: In this case we think that we could have done. Looking forward, we welcome the new powers that may be forthcoming in the legislation. One thing I will say is that we will not hesitate to prosecute where we need to. Over the last couple of years we have criminally prosecuted on a number of occasions. I have already mentioned one of those occasions. We have secured a custodial sentence for a trustee of 39 months. We are in the process now—we are in court now—of prosecuting for fraud and money laundering in another case. In total over the last two years or so we have prosecuted 23 times, so we will not hesitate to prosecute where we believe we need to.
Q56 Steve McCabe: Should I interpret that as a change of tack because in the past you were regarded as just full of empty threats, weren’t you? I think you threatened Carillion on seven separate occasions with the power to enforce pension contributions, but of course you did not do it. In fact, I think in your corporate plan covering—what was it?—2007 to 2010, you specifically say, “We use our powers or the threat of them usually as a last resort”. Why have you been so reluctant to take action?
Charles Counsell: You are right to say it is a change of tack. We are a very different regulator now than we were and we will not hesitate to use our powers when we need to.
You asked earlier about the synergies between automatic enrolment and the rest of the organisation. This is a good example of the lessons from automatic enrolment—and we are applying them to the rest of the organisation—that we are not afraid to use our powers when we need to. Absolutely, it is a change of tack and we will continue to do that.
Q57 Steve McCabe: Anyone who is listening who thinks they can get away with avoiding pension contributions and they can brush you aside—like Carillion were able to do—the message now is, “You are going to end up with an unlimited fine or you are going to jail.” Is that a fair summary?
Charles Counsell: Subject to the legislation, yes.
Steve McCabe: Thank you.
Q58 Chair: How many staff have you appointed that will deal with prosecutions?
Charles Counsell: We have a team dedicated to prosecutions but I do not know the numbers that are in that team, I am sorry.
Q59 Rosie Duffield: In your previous experience with the Money Advice Service, do you see the public being wary of investing in pensions because the Pensions Regulator has not been seen to have teeth or these powers before? Do you think that will change now that you do have, so that people will be investing again more freely and feeling a bit less frightened given these big scandals that have put people off?
Charles Counsell: I don’t know that there is evidence that people are afraid to invest in pensions. Certainly, in my time at the Money Advice Service that is not something that I saw. Of course, over the period from 2012 to 2017, we have seen huge increases in the number. That is to do with automatic enrolment and it is because the process of automatic enrolment is based on: you get put into a scheme and then you can opt out, but opt out levels are low. That does seem to imply that people are content to stay in the pension scheme. Certainly, the conversations that I have had—but I have to say this isn’t a scientific sample—very often people say that they are relieved to be saving now for their retirement.
Building on that point, what is important is that people do have confidence in the pensions they are saving in. That needs to be our focus, so that we can provide individuals with the confidence that the pensions that they are in are safe, well-managed and well-governed and are providing value for money.
Q60 Derek Thomas: This Committee recommended that there should be an assessment of the Pension Regulator’s suitability and readiness to regulate the collective defined contribution schemes. With your new hat on as Chief Executive, what is your view on that? Have you given some thought to whether there should be someone to look at whether you are suitable and ready for that job?
Charles Counsell: I certainly think we are suitable for it. The work that we have done to deliver the master trust authorisation process is an excellent example of why we are suitable for it. We have developed a “fit and proper” test. We have developed a series of tests that master trusts must go through in order to prove that they should be authorised. That is very applicable to CDCs.
I absolutely welcome CDCs. We require the legislation for them to come into existence but, subject to that legislation—meaning that they come into existence—we will be ready to regulate them.
Q61 Derek Thomas: Can you say a bit more about the preparations then, assuming we do get around soon to the legislation? How prepared? What preparations are you putting into place?
Charles Counsell: We will use the master trust authorisation process as a basis. We are also looking to work with the FCA and the PRA and the processes they use for supervision of schemes that are akin, in order that we can make sure that we have a process that is most applicable for CDCs. Clearly, CDCs are different from master trusts in their nature and, therefore, we must make sure that the regulation is specific to CDCs, but we will do that. I go back to my point on my expertise in delivering change. This is a change for the regulator but we will deliver it.
Q62 Derek Thomas: Did I sense a little frustration that legislation isn’t yet in place? What is your hope or what is your understanding of when the legislation will be in place?
Charles Counsell: I sincerely hope that it will be in in the autumn of this year. Clearly, there is a potential that it could be in earlier than that. Members of this Committee will have a better view of the likelihood of that than I do, but I sincerely hope that it will be coming into Parliament in the autumn of this year.
Q63 Chris Stephens: Charles, the pension regulator is responsible for the supervision of superfunds. Superfunds are not active at the moment but we know there are two set up. The first question to you is: if there was a superfund that became active tomorrow, do you believe as a regulator you have the resources to regulate those superfunds?
Charles Counsell: There is nothing to stop a superfund coming into existence now, you are quite right. There are two models that are currently emerging. We are actively engaged with both of those two models in setting out expectations for the regulation of superfunds. That is a combination of building master trust authorisation, fit and proper tests, making sure that they have the systems and processes in place, and that there is clarity about their funding and there is clarity about the sustainability of that funding.
If one came into existence tomorrow or next week with a scheme that was part of the superfund, it would be based on a voluntary regulation process. I don’t think that is the best place for us to be. I do believe that we need proper regulation of superfunds to be in place. Again, this is another matter for the Pensions Bill for later this year.
I will say that the superfunds that are emerging are absolutely co-operating with us. They are working with us to make sure that, as we develop the regulatory framework, they respond to our expectations. Clearly, that is a voluntary role at the moment.
Q64 Chris Stephens: You are indicating that there is insufficient regulation in place for these sorts of funds. Just to go back to the question: do you believe as a regulator you have the resources to look at and regulate those superfunds, or do you think that you would need more people to do that?
Charles Counsell: No, we have the resources to do it. What we do not have is the powers in the legislation. That is what I am seeking: to make sure that these things are properly regulated.
I am not for one moment suggesting that either of the superfunds that are coming into existence will do anything other than be willingly subject to a voluntary regime. Nonetheless, a voluntary regime is just that.
Q65 Chris Stephens: You do not think you would have enough powers to stop a superfund taking on a scheme if there was insufficient regulation in place? Would that concern you then?
Charles Counsell: It would concern me. We do have powers and we can use those powers. Of course, there are two sides to this. There is the superfund itself and there is the scheme that will be going into the superfund. The trustees of that scheme must look after the interests of their members. We would expect them to be really clear that the outcomes that they can expect for their numbers are better by going into the superfund than they would be if they stayed where they were.
Q66 Chris Stephens: Thank you. Turning then, Charles, to the discussions you would have with the Prudential Regulation Authority, you are having discussions with the PRA in relation to superfunds, regulation and those sorts of issues?
Charles Counsell: Yes, we are. We will continue to have those discussions over the next months but, absolutely, we are discussing with the PRA about how this might look. Clearly, the PRA has huge experience of this in terms of the insurance model.
Q67 Chris Stephens: Turning then to looking at superfunds and the possibility that these could take place, are you considering any future growth in your resources to tackle superfunds?
Charles Counsell: I don’t think that specifically we need additional resource to tackle superfunds. We would expect to supervise those superfunds. It probably depends on how prevalent the superfunds become, and it absolutely depends whether we are doing this on the back of legislation or not on the back of legislation. I would expect it to be more resource-intensive if we have to do this on a voluntary basis than if we are doing it because we have legislation in place.
It is a little bit difficult to see into the future about how many of things will be created. If you take the master trust model as an example, and if you go back to 2012, there were very, very few master trusts in existence. Before the master trust authorisation process came into being there was something approaching 90 that had emerged. I do not know if that is what is going to happen with superfunds but I do not think there is a market for 90 superfunds. That is where we need to be wary.
Q68 Nigel Mills: Do you think any trustee could responsibly decide to release the sponsor’s obligation of their scheme and move into a superfund that was not regulated?
Charles Counsell: It would be a big call for the trustees. I suppose there is an instance where the structure of the superfund, and the finances that they were guaranteeing that would go into the scheme, might mean it would be attractive. We would look very hard at it.
Q69 Nigel Mills: Do you have a veto? Would the trustees have to get your consent to do it?
Charles Counsell: There are two parts to that. We are looking at putting in place—for want of a better way of describing it—a voluntary clearance process. Again, I go back to the fact that absent legislation it is voluntary.
In extremis, of course, we have the power to put in place new trustees. If we really thought that this was not in the interests of pension members, that is what we could do.
Q70 Nigel Mills: The trustees would have to notify you that they were thinking about doing it before they actually went ahead?
Charles Counsell: We would certainly expect them to.
Q71 Nigel Mills: If they did not do that, that would be a very serious matter. They would be taking it upon themselves, in effect, in that situation?
Charles Counsell: Indeed.
Q72 Nigel Mills: Are alarm bells ringing? To some people this looks like a way of getting a buy-out on the cheap, rather than doing the insurance-based buy-out that should leave members with almost no risk to their future retirement income. You pretend you can achieve the same outcome but it is something much less. Are you thinking this is something we should be really closely scrutinising to make sure it is not a bit of a regulatory arbitrage that all goes horribly wrong at some point?
Charles Counsell: No, I don’t think so. In principle, I think superfunds are a good thing. What it should do is mean that pension schemes can have a better chance of ending up with full benefits. That does absolutely depend on the funding of the superfund model and, indeed, the commercial model that sits under that. Those are the sorts of things that we need to scrutinise.
Potentially, what this could do is lead to more people having a better chance of full funding. That may indeed lead in the end to full buy-out, and that is a potential for the superfund model.
What I do not think it does is solve the problem where there is a big funding deficit because I cannot really envisage why that would be commercially in the interests of the superfund, but I think superfunds are potentially a good thing.
Q73 Steve McCabe: I want to ask about trustees. The Competition and Markets Authority says that many trustees do not have enough information to judge if they are getting a good deal or not from investment consultancy services and fiduciary management services. Do you agree with that?
Charles Counsell: Yes, I do, and I welcome their report and their recommendations. It is really important that the trustees do scrutinise whether or not they are getting value for money from both investment managers and their fiduciary managers, and that they regularly review and put out to tender the contracts that they have and are alive to the risks of having those in one place, so I welcome that. We will be publishing guidance in early summer, hopefully in July, that—
Q74 Steve McCabe: Is this the guidance the Competition and Markets Authority recommended you publish?
Charles Counsell: Absolutely. What that will do is set out our expectations of how trustees might assess value for money, but also set out guidance about how they might go out to tender, both for investment managers and for fiduciary managers.
Q75 Steve McCabe: I think that was part of the problem—the way the fees are wrapped up, it is virtually impossible for them to know what the fees apply to. They are bundled together, so it is not clear to the average trustee what they are paying for. Is that how you understand it?
Charles Counsell: That is right, and this goes back to the wider point about making sure that pension schemes can prove that they are offering value for money to the savers that are within those pension schemes.
Q76 Steve McCabe: You spoke there about going out to tender. I think that was another one of the recommendations. Do you think trustees should be required to seek independent advice? I mean “independent” in the sense that it is completely independent of the scheme’s employers.
Charles Counsell: I am not sure I have understood the question.
Q77 Steve McCabe: At the moment, it is common for trustees in some schemes to receive independent advice but the advice is channelled via companies that already have a relationship with the scheme’s employers. Are you aware of that situation?
Charles Counsell: I confess, this is probably the time I can say I have been in the role for less than three months and I am not sure I can answer that question.
Q78 Steve McCabe: I was trying to establish how independent you thought any advice they received should be.
Charles Counsell: I would certainly encourage trustees to take independent advice.
Q79 Steve McCabe: Can you tell me a little bit about this annual statement? I notice you produced some recommendations around that—this annual statement that the chair of the trustees board is required to provide. How do you use that to assess the scheme’s trustees?
Charles Counsell: You are talking about the annual statement for DC schemes?
Q80 Steve McCabe: Yes.
Charles Counsell: We look at that annual statement against a number of criteria that we set out clearly in our guidance. The purpose of the annual statement is for the chair to specifically be able to say how they are managing the scheme, how they are governing the scheme and, therefore, why members can have confidence in that scheme.
The chair’s statement—if it is not forthcoming or not adequate—is subject to a fine. We have not hesitated to fine where we have felt that it is not adequate.
Q81 Steve McCabe: Am I right in thinking that there have been two recent examples of you fining people for that or are there more?
Charles Counsell: I think it is rather more than but I do not have the number today.
Q82 Steve McCabe: Am I right the Moore Stephens Pensions Master Trust is one and the EC2 Master Limited is another, is that right?
Charles Counsell: I am afraid I would need to come back to you with the details, but they are—
Q83 Steve McCabe: I am not doubting your word, but you said, “We will not hesitate”, and then you said, “I think there have been rather more than two”. Would it be possible to give us an indication in writing of how many there have been? That takes me back to my point about how well you use the penalties at your disposal. It would be useful to know. This is obviously quite a crucial power if that statement is vital as a monitoring tool for you.
Charles Counsell: Forgive me; it is not that we do not know. It is that I do not know.
Q84 Steve McCabe: I do not doubt your word. I am saying would you send us that in writing?
Charles Counsell: I absolutely will write to you with those details.
Q85 Ruth George: You have mentioned master trusts quite a few times and the authorisation process. You said just now that at the start of that there were around 90 master trusts in existence. Am I correct that there are only around 38 who have applied for authorisation or sought an extension? Do you think that that is a success?
Charles Counsell: Yes, I do. I think it is an absolute success. That is right. There are 38 existing master trusts that have applied for authorisation. There is one master trust that has come into the market that has applied for authorisation, so a total of 39. As you say, there were just shy of 90 before this whole process started.
It is absolutely a demonstration of the success of it. What this authorisation process has done is set a very high bar. That has meant that those who cannot achieve that bar—and who know they cannot achieve that bar—have said, “Right, we are going to come out of the market”. It was always my belief that there were too many master trusts and that we needed a form of regulation: first, to make sure that they were robust, well-governed and well-managed; and, secondly, to make sure that they were commercially sustainable. I think this process has demonstrated that it does exactly those two things.
In terms of how the processes worked, we set out our expectations of what they should put into their master trust authorisation application. We allowed master trust to do a trial run of that with us so that they could learn the lessons through that trial run. Not all of them did but a large number of them did. The majority of them went through that process. Now they are going through the real process to become authorised.
Yes, I absolutely think that this is robust. It is a high bar, and certainly the master trusts that I and my team have talked to have said that it is a tough test but have equally welcomed it.
Q86 Ruth George: Do you think that those standards that they now have to reach are at the end of the road of standards for master trusts, or in future do you see a further ratcheting up of those standards?
Charles Counsell: It is an excellent start. It is a high bar, but no, I do not think it is the end of the road for master trusts and our expectations of master trusts. Personally, I expect master trusts to be the exemplars. These are large schemes, holding money that has been automatically enrolled from savers through the change demographics I talked about, often much younger, lower paid people. They need to be the exemplars for pension schemes. The next stage is: we need to look at how they are demonstrating that they are offering value for money to their members. That is where I think we will go next.
Q87 Ruth George: That is good to hear. Is this going to create a two-tier system between members that are part of a scheme that is a master trust and those—and you saying that it is a majority of the master trusts that were in existence—that did not apply for authorisation and are now being broken up? What are you doing to support and make sure that those schemes are properly run and administered?
Charles Counsell: Each of the schemes that have not applied for master trust authorisation must tell us how they are going to exit the market and what their plan is for exiting the market. If that plan changes in any way, they must then tell us that that plan is changing. We expect them, therefore, to exit in a controlled way where members are protected. Frankly, I would expect the majority of them to go into other master trusts that are authorised and that process will happen over the next few months. That has already happened in some cases. There are more to go.
In terms of a two-tier system, the other question is about the long tail of DC schemes that are not master trusts. There are a lot of them. We need to be as clear with them as we are with master trusts about our expectations of how they are run and how they are governed. If they do not meet those expectations, and they cannot demonstrate to us and to their members that they offer value for money, real questions need to be asked about why they are still in existence. Once the master trust authorisation process is in place—once the schemes have been through that—where DC schemes cannot prove that they are well-managed, well-governed and offering value for money, we will be encouraging them to consolidate into those that can.
Q88 Ruth George: Do you require further powers or resources or legislation in order to do that, because it is much more of a proactive role than has certainly been taken on at the moment.
Charles Counsell: I don’t think so. We can do that within our existing resources and within the existing legislation. The reality is that consolidation is happening anyway, but we want to encourage it to happen where schemes cannot demonstrate—and to be clear, I am not saying that all small DC schemes are not able to prove that they offer value for money and that they are well governed and administered. That is not the case. Many of them can prove that. Where they cannot then we would encourage them to consolidate. I am not calling at the moment for any change to our powers.
Q89 Ruth George: You are simply going to encourage them to consolidate and if you see a scheme that is badly governed, that is not prepared to go into a master trust scheme, what do you see your role being in that case?
Charles Counsell: We have existing powers that we can use where the trustees are not up to the job. For instance, we used that recently where we replaced the trustees of the Dunnes pension scheme because we did not feel that they were up to the job of running the scheme.
Q90 Ruth George: We look forward to seeing that progress. Turning to the Rookes review and its scams and what went on with British Steel, do you feel that TPR in the last few months, since last October, is now working much more closely with FCA on scrutiny measures?
Charles Counsell: Yes, we are, and this is one of those instances where, coming back into the pension regulator, it is very interesting to see the change. We are working at all levels with FCA in a much more intensive way than we ever have historically. I welcome that. For instance, personally, I have had three discussions with the FCA in the three months that I have been here on various matters to do with pensions. That is replicated up and down the organisation.
The Committee will be aware that we published a joint strategy with the FCA last year, which I am really pleased that we have done. That has focused on a number of pieces of work but two specifically: one about value for money and how schemes can demonstrate value for money, whether they are contract-based schemes or trust-based schemes, and what the principles might be that underpin that. The second is on what we call the customer journey. That is, in essence, taking different demographics, different age groups or different income groups, thinking through how they interact with pensions over the course of their life, and what we can do more proactively to engage with them so that they can make sensible, well-informed decisions about their pensions.
Those two pieces of work are being undertaken now or under way. It is still early days for them but I think those are potentially transformational.
Q91 Ruth George: For that transparency and scrutiny by individuals of their own pension provision, presumably, the dashboard will be a very important part of that. Do you see expert scrutiny of the way that the industry is setting up the dashboard is going to be important?
Charles Counsell: Yes, I do, and we will play our part as part of that. We are actively engaged in the dashboard, as is the FCA, and we will have our role to play, particularly in setting out the standards that we expect of the data that will be supplied to the dashboard and making sure that our pension schemes deliver that data to the dashboard.
Q92 Ruth George: That is good to hear. Do you have any concerns about the proposals that were published in April for the plethora of dashboards of an industry-led nature that there is going to be and how that will enable investors, as you were saying, to see very clearly what is going on with their pensions?
Charles Counsell: I have been actively involved in the dashboard work, both in my previous role and then as Chief Executive of the Money Advice Service. I am genuinely really excited by the dashboard and the opportunity that it presents for people to be able to see the cash that they have in their pension schemes. It has to be right that people know because savers forget that it is their cash. It is their cash and it is sitting there waiting for them. The fact that they can see that all in one place is really important.
There must be one dashboard that is the public dashboard, and everything else but replicate that dashboard and must present the same information. It is not to say that I do not think industry dashboards are not right—I do—but there must be the public dashboard that has been recommended by the DWP.
Q93 Ruth George: I thought that with your history in auto enrolment you would be keen on the dashboard. That is good to hear. Coming back to the Rookes review, you gave an action plan to the Chair of the Committee a couple of months ago. How is that going?
Charles Counsell: We are making good progress with it. The first thing to say is that, even before the Rookes review concluded, we were actively engaging with schemes where we thought that there may be a risk of transfers out of DB, so we developed information that trustees can send to their members. We have sent that to 38 sets of trustees over the course of the period since British Steel to date.
Secondly, we now have in place a mechanism and a protocol with the FCA and the Money and Pension Service to be able to respond rapidly, should something like this happen again, and to make sure that we have our respective roles really clear and actioned out there. Our role is with trustees, the Money and Pension Service’s role is to provide guidance directly to consumers and the FCA role with IFAs. That is in place and that was part of the action plan. I am sure that we can improve that, and we will do so, but that is now in place.
The final major part of the action plan is a common hub of information available on our respective websites, but common information on our websites. We are working on that with the two other organisations and we expect that to be in place by the end of September.
Q94 Ruth George: You are confident that if a situation like British Steel happened again with the pension scheme, we will not see the scammers able to take advantage of employees in the same way?
Charles Counsell: I am confident that we will respond really rapidly to it. Anyone that loses their money through scams or through bad advice, it is outrageous, so we will absolutely play our part to make sure, as best as we can, that that does not happen.
We have had—and we continue to have—a very, very high focus on scams. I talked earlier about a judicial process that we are currently going through with a fraudster. We have been chairing Project Bloom for a number of years with a real focus, an organisational focus, on sharing intelligence and taking action where things might be going wrong. The Committee should be aware that we also ran, with the FCA, a campaign last year focused on scams and will be rerunning that beginning in July this year.
Q95 Chair: Just one last question, Charles. Are there any scamming operations now that you are trying to throttle?
Charles Counsell: There is one particularly because we are taking it through the courts as we speak. Yes, there are others that we are looking at and, wherever we can, we will throttle them. There are other things, of course, that have changed. Lots of scams came out—
Q96 Chair: Can you tell us roughly how many operations you are looking at?
Charles Counsell: I am afraid I do not have that number.
Q97 Chair: Do you tell the members that you on to a scamming operation affecting their pension scheme?
Charles Counsell: Again, I am afraid I do not know that but I am happy to provide that information after this meeting.
Chair: All right, very good. Thank you very much for the session.