Nausicaa Delfas, Chief Executive, gave a speech to the Mansion House Pensions Summit on why a focus on investment and value is worth pursuing.
Key points
- Trustees have a duty to act in savers’ best interests. This means working hard to deliver the retirement income that savers expect, including properly considering the full range of investment options.
- The Pensions Regulator (TPR) will not be telling schemes how to invest – that is a decision for trustees which involves a balance of risk and reward.
- We are evolving our regulatory approach to help shape the market towards fewer, larger, well-run schemes capable of investing in a diverse range of assets.
- Where schemes do not have the scale, expertise, or appetite to truly deliver for savers, it is time to consolidate and move their savers into a scheme that can. Savers deserve nothing less.
Thank you for inviting me to speak here today at this Mansion House Pensions Summit, at a critical time for pensions in the UK.
Saving into a pension is often one of the largest investments people make over the course of their lives.
Thanks to the success of automatic enrolment, nearly 9 in 10 workers save into a pension, a diverse group of savers of all ages.
The vast majority of those active savers are within defined contribution (DC) pension schemes.
Many will have never made an active choice to save and, almost universally, will not have made any investment decisions, with 97% staying within the default arrangement.
Yet, whether they know it or not – they bear the risk of their investments.
Given AE is only 10 years old, for some, their DC pot may be only an add-on now.
But as time goes by, many millions of savers are going to be increasingly turning to their pots to provide the primary source of their retirement income.
Those people rely on you in this room, and the pension system as a whole, working as well as it can to deliver the best possible retirement income.
As a regulator, we are clear that having fewer, larger, well-run schemes that facilitate investment in a diverse range of assets, will help to achieve this.
That is why we have welcomed the government’s pensions measures outlined in the Mansion House speech this July.
But we are also clear that with this shift in the pensions landscape, we also need a shift in approach by the industry as a whole.
Our expectation of industry
We expect:
- Sophisticated investment governance practices in all schemes – and diversified investments made with due care and attention.
- An efficiency mindset. Delivering ever better services for a fair price, recognising the economies of scale that size provides. We support consolidation in savers’ interests for all schemes, and will work with the industry to bring safe consolidation solutions to market.
- And highly qualified trustees, who are willing to challenge advisers to do better and make sure all savers get the best possible returns for their pensions.
The pension system has to work for those saving into it.
In defined benefit (DB) schemes this means that people get the benefit they were promised.
In DC schemes, it means a focus on the best possible outcomes for savers, which will be achieved by delivering good value, not just low cost.
Value for money
Value for money means: the investment returns and services received, for the price paid.
Pensions at their heart are an investments business, and returns – net returns – are, with contribution levels, the strongest determinant of how large a DC pot will be at the end of a lifetime of saving.
For a young person with a DC pension, even a small difference in returns could mean tens of thousands of extra pounds in retirement.
And yet we’re told time and again that cost is what often drives decisions. But in what other industry would you be buying a product or service based only on how cheap it is rather than also considering the quality of what’s provided?
That can’t be right.
Master trusts need to have the confidence that the market will allow them to compete in terms of value and returns.
The issue is not regulatory, but cultural – employers and advisors are deciding on schemes using the easiest metric to quantify, cost.
That has to change if we are to truly deliver good saver outcomes. We at TPR will play our part, through our work on a value for money framework, to try to focus minds on what really matters.
By mandating comparable, standardised data disclosures across the key components of value, we can lift the lid on performance and shift the focus from cost alone to real value. We want trustees of DC schemes to be focused on running the scheme to deliver excellent value for money and we want employers to choose schemes based on this same thing.
Support for diversification
That is why we are supportive of any attempt to help trustees consider alternative asset classes in the search for value and diversification.
Let me be clear. As a regulator we will not be telling schemes how to invest. That is a decision for trustees.
But we will be challenging decision-making to make sure trustees are always acting in members’ interests.
That means trustees understanding the balance between risk and reward.
Taking too much risk puts savers’ pots in jeopardy. But over-investing in low-risk, low return assets could also end up depriving them of much needed retirement income.
The key is achieving the right balance through investing in a properly diversified portfolio.
In both DB and DC schemes, trustees have a duty to act in savers’ best interests. That means working hard to deliver the retirement income that savers expect, including properly considering the full range of investment options.
The Compact is a voluntary agreement brought forward by firms searching for greater value for savers.
Whilst we would not advocate for investments in one asset class over another, we are supportive of innovation which is in savers' interests and initiatives which call on trustees to consider well thought out diversified investment strategies.
Private market investments of course can have a part to play in a diversified portfolio and new ways to access these opportunities are becoming available to trustees, such as long-term asset funds.
That is why by the end of the year we will provide new guidance on investing in private markets, and in due course we will be updating our existing investment guidance for DB and DC schemes.
Our new DB funding code will also clarify that there are no limitations on what constitutes suitable assets in which to invest, and all schemes can invest in growth assets, with much greater flexibility for open schemes and those further away from their end game.
Evolution of regulatory approach
As a regulator, we too are evolving our approach, to help shape the market towards fewer, larger well-run schemes that are capable of investing in a diverse range of assets.
Our focus will be to protect, enhance and innovate.
We will use our powers effectively to drive high compliance, and meaningful behaviour change amongst trustees. For example, we have launched a regulatory initiative to make sure schemes with assets under £100 million are complying with their enhanced value for members assessments. Historically our focus has been on guiding schemes and employers towards compliance – now with clearer expectations we will be more assertive, taking regulatory action and testing our powers to ensure savers are protected.
In this new pensions landscape, we will also go beyond basic compliance and seek to influence the market and drive ever greater outcomes.
We will be expecting schemes of all types to not only disclose ever more information, but to also analyse, interpret and act to spot and mitigate risks before they materialise.
We will need to work together to harness the powers of data and digital so we can quickly and easily spot potential risks and threats across the whole system and react accordingly.
That is why we are set to launch a new digital and data strategy outlining our future transformation.
And we have bolstered our investment specialism, hiring respected experts from the industry, to be able to interpret and analyse data and influence schemes towards ever better practice.
With this new more assertive approach and more ability to influence better outcomes for savers, we will be empowered to innovate in savers interests.
This means thinking creatively about our regulatory approach, working with the full extent of the pensions ecosystem, not just those who fall directly under our regulatory remit. Consultancies, administrators, regulatory partners – whoever has a direct impact on saver outcomes.
You will see multi-disciplinary teams of experts engaging with you, understanding performance in the wider market at large, and championing best practice wherever we find it.
An evolution of our regulatory and supervisory approach to match the evolution of the market.
Conclusion
So, to conclude, we are at a critical and exciting time for pensions and investments in the UK.
It is up to all of us here to help make the pension system work as well as possible for millions of pension savers.
TPR stands ready to work with you, to protect savers’ money, enhance the pensions system and support innovation in the interests of savers.
To help shape the pensions market to fewer, larger well-run schemes that facilitate investment in a diverse range of assets, to deliver better outcomes for savers.
To the schemes that do not have the scale, expertise, or appetite to meet our challenge and truly deliver for savers our message is clear.
It is time to consolidate and move their savers into a scheme that can.
Savers deserve nothing less.
Thank you.
