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Question
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Recommendation
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Should the Regulator be merged with the FCA?
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Trust-based and contract-based pension arrangements are regulated by the Regulator and the FCA respectively. The report notes that during the gilts crisis in September 2022, the Regulator and FCA co-ordinated well in their communications and decision-making. No changes were recommended in terms of combining overall pensions regulation within a single body.
The Regulator works with HMRC on auto-enrolment compliance. Although a unified employment regulator was proposed by Government in 2018, and a single enforcement body to include supervision of employers’ auto-enrolment duties was suggested by the Resolution Foundation in April 2023, this has not been progressed. The Regulator remains keen to explore the potential for sharing information on non-compliant employers with HMRC and other public bodies.
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The Regulator remains a standalone entity for the time being, and the Regulator and FCA should continue to work collaboratively to mitigate any risks arising from the split regulatory framework. DWP and HMT should keep the separate regimes under review, in parallel with the evolution of pensions policy.
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Should the Regulator’s statutory objective to protect the PPF be retained?
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The report examines the Regulator’s efficacy in achieving its statutory objective to minimise calls on the PPF. Some stakeholders have questioned whether this aim remains appropriate given the PPF’s current healthy financial standing, and there are concerns that it drives excessive risk aversion in the regulation of DB schemes. It seemed odd having created a system addressing the risk of scheme failure, to then have a statutory objective to avoid using it. Was the resultant degree of risk aversion in savers’ best interests? The significant discount applied to PPF compensation payable to some savers was recognised as a further question but deemed beyond the scope of the review.
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Following the implementation of the DB funding regulations, the Regulator should work jointly with the PPF to manage DB pension schemes unlikely to achieve buy-out in such a way to maximise benefit to savers.
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What is the significance of pension funds for the wider financial stability of the economy?
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Following the 2022 gilts market volatility and the examination of schemes’ use of LDI, questions arose about how the Regulator fits into the financial stability regulatory framework, and whether it should be given a statutory duty to consider the impacts of the pensions sector on the wider financial system. The Work and Pensions Select Committee’s findings in their recent inquiry on DB schemes’ use of LDI were considered in depth. It was recognised that the events of Autumn 2022 demonstrated that neither the Regulator nor any other regulatory body had access to real-time information on pension fund assets and liabilities.
In March 2023, the Financial Policy Committee published its recommendations on LDI funds that the Regulator should specify minimum levels of resilience to ensure funds are resilient to a yield shock of 250 basis points, with funds maintaining levels above this to manage day-to-day volatility.
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The Regulator works with HMT and DWP to determine how it should best interface with the Financial Policy Committee on financial stability. This should include consideration of whether the Regulator should have a formal objective in respect of financial stability as well as the powers to fulfil such a role effectively.
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Should the Regulator have a future role in respect of economic growth and productive finance?
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After examining the various regulators’ roles in respect of economic growth, the report concludes that regulators’ most important contribution is the provision of stable and predictable “rules of the game” to support investment and other business decisions. As for the issue of “productive finance” and the shift of net pension fund wealth out of UK equities over the past 2 decades, savers’ interests should be paramount in pension fund asset allocation. Whether the pensions system drives allocations that are in members’ best interests should be the Regulator’s focus. Some trustees recognised that there is a “sweet spot” in terms of scheme risk, between allowing DB schemes to stay open with an attractive offer to new members and running the risk that the schemes make undeliverable commitments. They felt regulation had pushed schemes too far towards de-risking.
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The Regulator to factor into its annual review of corporate strategy its role in monitoring asset allocations and the likelihood of delivering good long-term outcomes for savers.
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Is there scope to extend the Regulator’s remit to other players in the pensions supply chain?
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The report’s view of the current voluntary basis of the Regulator’s engagement with three pension scheme administrators was that it is an unsatisfactory half-way house. Bearing in mind the recent ransomware attack on a major scheme administrator, the DWP should assess the case for bringing administrators into formal regulation.
As for the wider appointment of professional trustees, the report recognises there are currently insufficient numbers of professional trustees for an appointment to each scheme to be mandated. Consolidation of schemes over time would reduce this disparity but could also disincentivise those willing to qualify to the role. DWP and the Regulator should consider the desirable pension industry structure “end- game” and the trajectory for getting there, and they are undertaking further work on trustee capability.
Other professionals in the pensions supply chain such as accountants, financial advisers and actuaries are overseen by their respective professional bodies.
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The Regulator to monitor the evolution of the pensions supply chain and flag any concerns about regulatory gaps to DWP.
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Should the Regulator have specific rule-making powers?
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The 2019 review recommended that DWP consider giving the Regulator powers to make rules in specific circumstances, particularly in relation to information-gathering. This was not fully considered due to competing pressures from Brexit and the pandemic, and thus is revisited in the 2023 review.
There are recognised drawbacks in having powers largely reserved to DWP and dependent on primary legislation. Lack of legislative time creates resource-planning challenges and changes are often signalled then significantly delayed. While core pensions policy should sit with the DWP the report says that day-to-day regulation should be delegated to the Regulator, for example in relation to information-gathering, within constraints. This would give the Regulator greater agility.
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DWP to consider delegating day-to-day regulatory powers to the Regulator and the two bodies should jointly produce an options paper analysing the areas of rule-making that could be delegated.
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Is the Regulator too reluctant to use its enforcement powers?
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The Regulator’s appetite to use its toughest sanctions available under its “anti-avoidance powers” (contribution notices and financial support directions) was examined. The Regulator had cited FSDs as particularly cumbersome to use. The report concluded that the Regulator was right to focus on “co-operative regulation” rather than enforcement to drive up standards. However, the full suite of powers should be used when necessary, as a perception of reluctance was damaging.
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The Regulator to review its enforcement approach and DWP to consider the case for simplifying the FSD regime.
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Are there compliance issues relating to auto-enrolment?
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Overall, the Regulator has set and monitored high targets for auto-enrolment compliance, resulting in 99 per cent of workers working for compliant employers. The Regulator is found to be effective in protecting almost all workers and ensuring the great majority of employers meet their obligations.
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The Regulator to consider whether there are cost effective options to increase incentives among smaller and financially weaker employers, and to secure contributions early from those in financial difficulty.
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How should the Regulator take forward scheme consolidation?
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Policy initiatives are underway to drive consolidation, with the ultimate goal being a less fragmented and more professional pensions sector. The Regulator will need to oversee a “long tail” of small schemes (5,000 DB and over 25,000 DC schemes) for the foreseeable future. A different supervisory approach will be needed for the largest schemes which may be professionally run but which have potential to cause harm on a much bigger scale.
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The Regulator to develop a strategy driving consolidation among smaller, sub-scale schemes at the risk of being badly run, and also sets out its supervisory offer to the larger, sophisticated schemes. It should include consideration of any new powers it might need to achieve this, and any additional capabilities it needs to invest in.
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What are the Regulator’s plans for digital transformation?
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The Regulator has stated its ambition to be data-driven and digitally enabled. This includes use of data to give a more detailed picture of activity in the sector, to better identify risks and more automation of manual processes to reduce costs.
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The Regulator to develop a clear strategy for digital transformation in terms of both invest-to-save and invest-to-improve measures. The best of in-house skills and external contracting should be employed to minimise costs and develop internal capability.
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