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 …
17.3m private sector scheme
member records in total
86.5% of member records
are in large DB / hybrid
20,000,000
15,000,000
DB and hybrid
10,000,000
DC
5,000,000
0
2 - 999 members
Source: The Pensions Regulator
(Pension schemes in the UK, 2005)
1,000 + members
… but biggest proportion of schemes
is small DC
84,600 ‘live’ occupational
private sector schemes in total
85% of schemes
are small DC
100,000
75,000
DB and hybrid
DC
50,000
25,000
0
2 - 999 members
Source: The Pensions Regulator
(Pension schemes in the UK, 2005)
1,000 + members
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…
Active membership in private sector occupational schemes (millions)
7.0
6.0
5.0
Prediction >>
4.0
3.0
2.0
1.0
0.0
1979
1983
1987
1991
1995
DB membership
2000
2004
2008
2012
DC membership
2016
… but even with the shift to DC, DB will remain
important
Membership in millions
20
15
10
5
0
1995
DB active
2000
DB deferred / pensioner
DC active
2004
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
Spotting a needle in a Haystack
(MI5 Intelligence)
Must win the War
(Active Intervention)
Intelligence
based action
Active
Intervention
High priority
Risk
Medium priority
Bobby on The Beat (Proactive
Monitoring)
Educate & Support
(Very Light Touch)
Minimal scheme
specific action
Proactive
Monitoring
Size
Low priority
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