Pension regulation in the United Kingdom

Tony Hobman

Chief Executive, the Pensions Regulator

Warsaw, September 2006

UK pensions: the landscape

The UK pensions landscape

•Large numbers of occupational schemes

– circa 10,000 DB or hybrid schemes

– circa 74,000 DC schemes, most of which are small

BUT …

•Most members belong to large schemes

– over 85% of member records are in 1,600 large schemes

Biggest proportion of members is in large DB …

0

5,000,000

10,000,000

15,000,000

20,000,000

2 - 999 members 1,000 + members

DB and hybrid

DC

Source: The Pensions Regulator (Pension schemes in the UK, 2005)

17.3m private sector scheme member records in total

86.5% of member records are in large DB / hybrid

… but biggest proportion of schemes is small DC

0

25,000

50,000

75,000

100,000

2 - 999 members 1,000 + members

DB and hybrid

DC

Source: The Pensions Regulator (Pension schemes in the UK, 2005)

84,600 ‘live’ occupational private sector schemes in total

85% of schemes are small DC

The UK pensions landscape

•The trend is from DB to DC

– very few new schemes registered in the UK since January 2000 are DB

– it is possible that by 2012 there will be equal numbers of active DB and DC members

BUT …

•DB membership (especially deferred and pensioners) will remain significant for many years to come

•DB assets in UK are circa £700bn (over €1,000bn)

Active DC membership is growing…

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1979 1983 1987 1991 1995 2000 2004 2008 2012 2016

DB membership DC membership

Active membership in private sector occupational schemes (millions)

Prediction >>

… but even with the shift to DC, DB will remain important

0

5

10

15

20

1995 2000 2004

Me

mb

ers

hip

in m

illio

ns

DB active DB deferred / pensioner DC active DC deferred / pensioner

The risks

What are the main risks to scheme members?

•DB – underfunding

– avoidance

•DC– administration

– members’ understanding

•All schemes– trustee competence

– investment

– fraud

2005: A new regulator

The new regulator

•Before 2005: the old regulator (Opra)– emphasis on compliance

– limited powers, reactive

•New legislation in 2004

•April 2005: the Pensions Regulator is created– risk-based

– wider powers, proactive

– Pension Protection Fund also created

A new regulator

•Our objectives– protecting members’ pension benefits

– raising standards

– reducing risks to the Pension Protection Fund

•Our approach

– identifying risks

– providing support, preventing problems

– education and guidance

– intervention when required

Our regulatory powers

•Gathering information and identifying risks– the scheme return

– ‘whistleblowing’ reports

– ‘notifiable’ events

– DB recovery plans

•Preventing problems and putting things right

– improvement notices / third party notices

– recovering unpaid contributions

– freezing orders

– disqualifying trustees

Our regulatory powers

•Taking action against avoidance of, or insufficient support for, DB liabilities

– contribution notices

– financial support directions

– issuing clearance for corporate transactions

Looking back: our first year

2005 – 2006

Main themes for 2005 – 2006

•Developing a risk-based approach to regulation

•Helping to support scheme funding

•Working with the PPF to protect members from employer default

•Working to raise standards: codes of practice, guidance, training materials

Developing a risk-based approach

•Categorising risks

– level and nature of risk

– number of members potentially impacted

•Collecting data

– environmental scanning

– reports from and about individual schemes, intelligence

– the scheme return

•Appropriate use of resources

– when is active intervention appropriate?

The risk and intervention model

High priority

Medium priority

Low priority

Must win the War(Active Intervention)

Spotting a needle in a Haystack(MI5 Intelligence)

Bobby on The Beat (Proactive Monitoring) Educate & Support

(Very Light Touch)

ActiveIntervention

Intelligence based action

Proactive Monitoring

Minimal scheme specific action

Size

Risk

Supporting scheme funding

•DB underfunding presents a potential risk to scheme members

•Trustees and employers must develop prudent funding targets / recovery plans suitable for their schemes

•We use risk-based filters to review recovery plans

•Problems must be reported to us (e.g. failure to reach agreement)

Clearance: protecting scheme members

•Corporate activity has the potential to put members benefits at risk

•We can take action if

– there has been deliberate avoidance

– a scheme is not properly supported

•Optionally, companies can apply for clearance

Raising standards

•Codes of practice

– help trustees, employers, advisers etc to understand their responsibilities

– have evidential status

– subjects include ‘whistleblowing’, funding, late payments

•Other guidance, eg on cross-border schemes

•‘The trustee toolkit’

– online learning for trustees

– free, available to all

What next?

2006 and beyond

Main themes

•Continuing to support the process of scheme funding

•Improving standards of governance

•Tackling risks to DC scheme members

Getting a clearer picture

•Policy must be based on

– high-quality, up-to-date information

– consultation with the regulated community

•Governance survey– independent, anonymous

•Key findings include:– smaller schemes more likely to need support

– importance of training

– need for risk management

– need to manage conflicts of interest

In conclusion …

•A new risk-based regulator

•Emphasis on education and prevention

•Stronger powers to

– gather information

– take action

– set standards

•DB funding a key focus: we are equally concerned with DC issues and governance overall