Tough new approach from pensions regulator, increased scrutiny for schemes
The Pensions Regulator (TPR) has unveiled a new logo and a new approach, in a paper entitled “Making Workplace Pensions Work”.
The new approach will result in greater scrutiny ‚Äî and intervention ‚Äî for pension schemes and employers operating or contributing to them. TPR’s aim is to drive up standards and tackle risk by engaging proactively with a larger proportion of the schemes it regulates. Initially a number of larger schemes will have dedicated one-to-one contacts and TPR’s intention is that this greater level of engagement will ultimately affect all schemes, particularly defined contribution (DC schemes), which have to date had rather less intervention.
What happens now?
Currently, schemes and employers all deal with TPR from time to time. Among other things, employers have to confirm compliance with automatic enrolment obligations. Meanwhile, trustees have to submit an annual return, and a system of “notifiable events” operates so that both trustees and employers have to tell TPR if certain things happen.
Many schemes and employers, however, have no real regulatory engagement beyond submitting standard documents. Things can go wrong, even where TPR is involved, such as in a number of recent high-profile corporate failures. TPR has been publicly criticised for having failed to intervene, despite having been engaged with trustees and employers.
The Pensions white paper and consultation propose additional powers for TPR and a much more stringent notifiable events regime, so that TPR can become involved earlier on in corporate activity and can act to protect pension schemes more easily than it can at present.
The new approach is in the same vein: employers and trustees should certainly expect to engage with TPR more often.
What is going to change?
TPR has said it will concentrate on identifying risk early and driving compliance through supervision and enforcement. This will mean more schemes will be contacted by TPR, for example, about their valuations and funding arrangements, including agreed deficit repair contributions. One-to-one supervision of larger or riskier schemes, starting this autumn, will be rolled out to more schemes as time goes by or if there are particular concerns.
Trustees will find themselves dealing with correspondence, calls and meetings with TPR to discuss risks which it has identified. Failure to address those risks in a way which TPR thinks is acceptable could result in the issue of “improvement plans”, telling trustees and employers what they need to change to satisfy the new, tougher regulator. The plans will then be monitored.
Defined contribution schemes are specifically mentioned by TPR; historically, they have had little intervention from TPR, whose focus has been on defined benefit (DB) schemes. But DC schemes are now the norm, particularly after auto enrolment, and since the nature of a DC scheme is that the member bears the risk (that is, of investments not performing well, of charges being high, of not being able to buy a decent pension at retirement), it is no surprise that the regulatory spotlight will shine here in future.
What does this really mean?
TPR’s tougher stance on DB scheme valuations has already been in evidence. Until recently, if a valuation was not completed by the statutory deadline (15 months after the valuation date), provided TPR had been given an explanation and a new deadline put forward, it would generally “watch and wait”.
A valuation had to be significantly late before TPR took action. It recently fined the trustees of one scheme for not having completed their valuation on time: that valuation was more than five years overdue before TPR took action. TPR is now challenging trustees and employers who are asking for modest time extensions and insisting that valuations are completed.
It is unclear whether additional resource will be available to allow TPR to strengthen its approach or whether other areas will see reduced focus as resource is simply redirected. There is a lot of focus on speedy action and intervention, but that will need more manpower if it is to be effective, and at the moment it does not seem that will be provided.
The new approach does not necessarily mean TPR will use its enforcement powers more often – it expects most engagement to lead to voluntary compliance. Lesley Titcomb, TPR’s chief executive, has said she does not expect the regime to become more punitive, but that it will be able to spot issues sooner. Titcomb described the new approach as a “sea-change in how [TPR] will be interacting with the industry”.
While it would be better to stop problems arising by acting earlier, if TPR’s new, tougher stance is to have meaning, it will have to be prepared to use its enforcement powers, whether existing or any new powers granted to it.
What do firms need to do?
Schemes will need to pay particular attention to TPR’s expectations for both DB and DC schemes, and be ready to explain their position where they are not fully compliant. There will be more contact from TPR when submitting valuations or annual returns, and in particular if there is press coverage relating to an employer’s business. Trustees should make sure they take advice and keep appropriate records of discussions, both among themselves and with their employer, and of their decision-making processes. Many schemes will already do this, and will already consider how TPR will react to decisions they make. Trustees who do not do this should begin now and be prepared to devote time to engaging with TPR.
Employers should also be prepared for more engagement with TPR, and for TPR to be ready to use its powers more often. The pension scheme should be taken into account when the employer is making decisions about dividend payments or changes to its business, and employers should be ready for tougher negotiations about scheme funding at valuation time.
Many schemes are well-run, with trustees and employers fully engaged in the operation of the scheme, acting in accordance with their duties under legislation and their scheme rules. TPR has recently published the results of surveys of DB and DC schemes, which show a great many schemes complying with TPR’s requirements already, and compliance levels improving year on year. Those trustees and employers who take advice, consider both their duties and the interests of schemes members, and act accordingly should see low levels of intervention from TPR, even if there is more engagement.
It remains to be seen what TPR’s new approach means in practice.
Vikki Massarano, Partner
This article was published in Thomson Reuters Regulatory Intelligence
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.