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 … 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 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… DB membershipDC membership Active membership in private sector occupational schemes (millions) Prediction >>

… but even with the shift to DC, DB will remain important Membership in millions DB activeDB deferred / pensionerDC activeDC 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) Active Intervention 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