Nausicaa Delfas, CEO of The Pensions Regulator (TPR), gave a keytnote speech to the Annual Conference of the Investment Association titled 'Pension regulation in an era of change'. The below speech may not be identical to the delivered version.
Key points
- This is a pivotal time for the pensions industry as savings schemes transform into holistic pensions systems.
- TPR's role is to work in the interests of the saver, helping industry to protect and enhance pension pots.
- New pension environment means every part of the pension ecosystem, from trustees and administrators to regulators and asset managers must re-assess the way they work.
- TPR calls on the investment industry to play their part in the transformation and ask what they can do to work innovatively in saver's interests.
Good morning.
It's been 2000 years or so since the Romans first introduced the concept of workplace pensions to Britain. Augustus needed a recruitment tool for legionaries and came up with the idea of awarding a lump sum on retirement. It was the first gold-plated final salary pension – some compensation for trudging around Europe and fighting ungrateful locals!
Unsurprisingly, the system has evolved somewhat over the last couple of millennia. But with changing demographics and investment landscape, the last decade has perhaps seen the most rapid rate of change.
Ten years ago, auto-enrolment put millions of people onto a savings pathway, creating a system where more than 8 in 10 workers contribute into a pension.
This is a fantastic success.
But if the challenge of the last decade was getting people saving. The challenge of the next is to make sure those savings grow adequately. There is still a very real risk that millions of people who have defined contribution (DC) pensions will not have enough to support themselves in later life.
The recently launched Pension Schemes Bill is the government's answer to that quandary. It marks a pivotal step as the industry transforms from a savings system into a fully holistic pensions system.
As regulator we stand ready to support the government. Our mission is to protect and enhance savings – working innovatively to do so.
Over the next few minutes, and during our Q&A session, I will lay out how TPR is moving to a more prudential style of regulation, but I also want to consider how the investment industry can complement our search for savings growth.
Because as investment managers you also lie at the heart of the transformation of the pensions system.
The way you steward capital, assess long-term risk and respond to an ever-changing world will have a profound impact – not only on financial outcomes, but on the security and dignity of millions of savers.
Good member outcomes is the driving force of our work
Over the next few years most workplace pensions will be consolidated into larger schemes. Our key priority is to ensure those schemes, each with billions of pounds of savings in them, are protected.
Therefore, we have been very clear that trusteeship needs to come into line with other professions and corporate governance standards. Learning from others and applying the best of analogous regimes within our own regulatory sphere of influence is the goal. So, we will be launching a new strategy to guide trustees as they navigate this new world of mega funds and super funds.
We want their decisions to be the product of informed decision-making based on good governance with a view to the best financial interests of members.
This is particularly important in DC default schemes – where around 94% of savers remain – because just as taking too much risk puts good saver outcomes in jeopardy, over-investing in low-risk, low return assets over the long term could deprive those savers of much needed retirement income.
Value for Money (VfM) Framework is key for future success
Complementing this approach will be the VfM Framework. Jointly developed with the DWP, it will require schemes to disclose their investment performance, costs and charges via clear data. This will allow extra scrutiny of schemes and drive positive, long-term outcomes for savers.
Until that comes into force, TPR with the Financial Conduct Authority (FCA) will also launch a joint market-wide data collection exercise which will include asset allocation information in workplace DC schemes.
The exercise will run annually until the VfM disclosure data becomes available. This voluntary exercise will allow the market to start to understand the connection between value and asset allocation and returns and make more informed investment decisions for their kinds of savers.
Our greater engagement with industry means we can gather valuable evidence and insight to better understand the full risk landscape and prioritise our efforts as regulator based on harm or opportunities for the saver.
Bigger schemes allow for greater sophistication
As schemes are consolidated, and the pot of money held by each grows, so too does the advantage of scale.
This opens the door to greater investment sophistication, and new strategies to deliver for the saver. Professional in-house teams can manage portfolios dynamically, ride out volatility, and, crucially for growth, access private markets and complex instruments.
And, with bigger, better-run funds, comes an increased flow of investable capital.
You will be aware that the government is keen for some of those large funds to be invested in UK focussed assets. Indeed, the Mansion House Accords are a bold step towards unlocking pension capital for national growth.
As regulator we want to see saver's pension pots enhanced, and of course we want to see the UK's economy grow. Equally, we want to ensure the independence and fiduciary duty of trustees.
The VfM Framework will provide useful guardrails and support as trustees decide how and where to invest.
What can investment managers do?
We all have a chance to shape the changing landscape so that in 10, 20, 30 years' time – people who are working hard and saving today can have a comfortable retirement.
So I ask this question…what are you doing to play your part in the pensions revolution?
Are you being supportive enough of long-term assets? The FCA has authorised Long-Term Asset Funds (LTAFs) to provide DC schemes with access to illiquid assets – could they be integrated into default strategies?
Could you be designing multi-asset solutions that are optimized for decumulation? Many DC pots lie in default funds that simply aren't working hard enough – can you be more dynamic? More personalized in your approach?
It is incumbent on all of us to ensure that pots grow, and people are protected in their older years.
Conclusion
We are no longer living in a world of gold-plated final salaries, but we are living in a time of re-invention.
A time in which we can re-think the status quo and shape the future.
Afterall the decisions we make today won't just shape portfolios – they'll shape people's lives for decades to come.
Thank you.
