Nausicaa Delfas, Chief Executive of The Pensions Regulator (TPR) gave a speech at the British Private Equity and Venture Capital Association (BCVA) UK Pensions Summit entitled: 'Transparency in investment performance can truly deliver for savers'.
Key points
- The pension system of today is unrecognisable from the past, moving towards fewer, larger schemes. This requires a different approach to make sure savers get good outcomes from pensions.
- With the forthcoming Pensions Bill and the government’s two-part pensions review, we now have a unique opportunity to look at how we can make the pensions system work for everyone. We need your help to get this right.
- Value should be the prism by which we view everything we do, and as a regulator we will be stepping up our focus on investments.
- We believe sound investment in diverse assets can not only improve outcomes for savers but could also generate growth for the UK economy. The two don’t have to be in conflict.
- But for there to be meaningful, positive changes in investment strategies, there must be greater transparency in industry around performance and costs. The first step is to bring greater transparency on value through our forthcoming value for money framework.
Good morning and thank you for inviting me to speak here today.
Every month, more than 8 in 10 UK workers invest into a workplace pension.
They do so in the hope that after many years of work, they have something to support them financially in older life.
The vast majority save into a trust-based occupational pension. And that means something special.
It means that the people running those schemes have made a promise: To invest people’s money well and to do the best they can by them.
To uphold a duty to always act in their interests.
And I’m here to talk to you today because – with a new Pensions Bill and two-part government pensions review – we have a unique opportunity to look at how we can make the pensions system work for everyone.
And we need your help, to get this right.
I want every saver to be in a scheme with sophisticated investment governance practices – overseen by trustees that know what their long-term goals are. And for those trustees to really know that the goals they have set, meet the needs of their members.
I want every scheme to invest in a diversified portfolio which not only helps protects them from shocks, but also delivers the returns they need in the long-term.
And I want to make sure that at the end of 30, 40 or 50 years of saving – every saver looks at their pension and thinks “that was worth it”.
Through automatic enrolment we have built a nation of savers, doubling private pension participation.
But now that people are saving, we must make sure the system delivers the retirement income people need.
The differences in the market today
The pension system of today is unrecognisable from the past.
The shift from defined benefit (DB) to defined contribution saving (DC), with both sides of the market developing differently.
DB is still highly fragmented and largely sub-scale – with 5,000 DB schemes, 75% of which have less than £100m in assets.
Market conditions and careful stewardship mean that funding positions are healthier than at any point in recent memory – with around 80% of schemes fully funded.
And with just 4% of schemes fully open, many are considering their end game options – with new products such as superfunds emerging to challenge the long-trodden path to buy-out.
In DC, some may still say the market is fragmented, with around 1,000 schemes.
But the reality is, it is increasingly concentrated and commercialised, with just 5 master trusts stewarding two-thirds of all assets under management in the DC trust-based system.
We are seeing a rapid consolidation towards fewer, larger schemes.
A landscape of complex, financial institutions of soon to be systemically important size.
This means that the approaches of yesterday, will not see us meet, head-on, the challenges and opportunities of the future.
We have to find a different way and reset our priorities.
I believe that in this future, it is value which must be the prism by which we view everything we do.
Scrutinising investments to seek greater value
That is why as a regulator we are stepping up our focus on investments.
We have doubled our number of investment consultants, and completely changed our structure to help make us more market-facing and outcome-focused.
You will notice a difference in how we engage with schemes and also the wider market.
We want and expect different kinds of schemes to invest differently depending on the needs of their members.
For example, the investment decisions that a trustee of a mature, closed, defined benefit scheme will make – where their sole purpose is to pay the promised benefit – will clearly be different to a DC trustee who is considering the right portfolio for the growth phase of a newly enrolled saver.
What we instead expect them to share is proper risk management controls, and a genuine understanding of what the right balance of risk and reward is for their type of member, and their type of scheme.
We want a clearly defined objective for savers within a scheme, which trustees regularly review. They should understand the likelihood of achieving those objectives comparing their real-world performance with their forecasted models and adjusting strategy accordingly.
Investment decisions are not no-risk, but instead should be the product of informed decision-making. Because just as taking too much risk puts good saver outcomes in jeopardy, excessive caution, and over-investing in low-risk, low return assets could end up depriving them of much needed retirement income.
And that is where we will seek to probe.
We won’t tell schemes how to invest, but instead pose the right questions and make sure trustees and schemes have the controls, capability and scale to really deliver for savers.
We believe sound investment in diverse assets can not only improve outcomes for savers but could also generate growth for the UK economy. The two don’t have to be in conflict.
Properly considered 'Productive finance' including private and venture capital investments do have a role to play in a diversified portfolio.
We know that some schemes are experts in private market investments, particularly large open DB Schemes, but we want to enable all schemes to have the ability to invest if it is in their members’ interests.
And trustees have historically struggled to capitalise on opportunities for a number of reasons.
- Fewer mechanisms to enable access to private markets.
- Less readily available public information to assess investment prospects… alongside challenges in valuations and practices that concern us... such as Non-Disclosure Agreements
- And higher costs from increased due diligence and complex ongoing management.
But in the search for value, it is only right that trustees have the capability to consider these kinds of investments if they have the potential to deliver for savers.
We have played our part in seeking to raise the standards of trusteeship through new guidance on private market investments – helping equip trustees with the right questions to ask and challenging them on their approach.
And the market has innovated to broaden access, with 8 new Long-term asset funds with a mix of investment opportunities, including in renewable energy and climate transition.
But for there to be meaningful, positive changes in investment strategies – there must be greater transparency in industry around performance and costs.
Otherwise, how can trustees ever understand if they are making decisions which will meet their objectives for savers?
Value for money
I want every trustee and their advisers to know and understand the returns, and services received, for the price paid.
That is why we will increasingly turn to disclosure to help foster a different kind of market dynamic and support a different type of supervisory engagement.
Because there are harmful market dynamics that we must address if savers are to receive the best possible outcomes from pensions.
In DC, it can’t be right that the only barometer of a successful scheme is offering the lowest price.
And yet here is where the competition is focused, with master trusts competing far below the 0.75% charge cap, with 83% of members across the whole market subject to fees of 0.5% or less.
And whilst fees may be the same, investment performance and scheme services can widely differ.
We need to move the competitive pressure away from cost alone to value.
The first step is to bring greater transparency through our forthcoming Value for Money Framework, committed to in the Pensions Bill.
Whilst not a panacea, it will bring consistent comparable metrics that matter to the market, at the same time, in the same format.
Crucially, through many years of joint working to reach consensus, this will go across both sides of the market thanks to newly proposed FCA-rules also in development.
In asking schemes to publish this data, and make their assessments of value, we don’t seek homogeneity.
In a truly competitive market, schemes will cater to different groups of employers with different product offerings.
What we want is that variation, to be a conscious decision by trustees and employers based on the wants and needs of their pension savers.
Not as a by-product of a lack of transparency.
A unique opportunity to make pensions work for everyone
The Value for Money framework is part of a raft of measures the government intends to bring forward in its upcoming bill.
And at the same time, its two-part review is looking ahead and seeking views on what kind of system we need in the future.
This is a unique opportunity to make pensions work for everyone. With automatic enrolment, we have built a nation of pension savers – now we need to ensure that they receive value from their saving, from joining the workforce, to right through retirement.
You in this room are experts in capital markets and we need you to engage. Not just with the review, but with each other.
Commercial considerations can sometimes mean we’re guarded as an industry – but to really get this right, we have to talk to each other more… to understand where the barriers and opportunities are and come to some consensus on a way forward.
Let’s not waste this opportunity. Thank you.
