Pensions regulation in the future

According to its recently published corporate plan for the period to 2021, the Pensions Regulator intends to become clearer, quicker and tougher in the way that it regulates pension schemes in the UK. How will it do this and what will it mean for trustees?

What factors are influencing the Regulator’s approach?

There are a number of factors which the Regulator believes will be important over the next few years:

1. Changes in the economic and political environment. Scheme employers will need to adapt to the post-Brexit economy and trustees will need to ensure that the strength of their employer’s covenant is monitored closely. Schemes should also expect to see greater volatility in investment markets and trustees should consider how their investment strategy will be affected.
2. An ageing population. A key risk for trustees is the increasing life expectancy and the fact that people are typically spending more of their life in retirement. This creates cash flow risks for schemes which need to be monitored as a scheme’s membership profile matures.
3. Pension schemes are increasingly at risk of cybercrime; cyber security and data protection should therefore be high on the agenda for trustees.
4. Auto-enrolment. The wider pensions industry has been transformed by the introduction of auto-enrolment and the Regulator is keen to monitor these changes. DB membership has declined to around 11 million since the introduction of auto-enrolment while membership of occupational DC schemes has increased to over 12 million during the same period. Despite this, DB schemes still hold the vast majority of assets.

The Regulator’s priorities

The Regulator’s corporate plan sets out the eight key priorities for the Regulator to focus on over the next three years:

1. Effective regulatory intervention across all schemes. The Regulator intends to intervene on a wide range of issues over the next few years. It has said that it will tailor its approach to the risks and circumstances of each scheme and will use a wider range of regulatory tools.
2. Improving governance and administration. The Regulator is keen to improve standards of governance across all schemes and will encourage schemes to explore consolidation or professional trusteeship where the necessary standards are not met. The Regulator has stated that it expects trustees to challenge and understand advice and to have a clear decision making process.
3. Effective regulation of DB schemes. The Regulator will actively oversee, and intervene where necessary, to maintain the correct level of funding and sponsor support so members’ benefits can be paid as they fall due.
4. Effective regulation of master trusts. The application process authorisation of master trusts will start in October 2018 and further specific regulatory guidance will then follow.
5. Ongoing automatic enrolment duties. Now that most employees have been automatically enrolled, the Regulator will concentrate on ensuring that employers comply with their ongoing duties to pay contributions.
6. Brexit. The Regulator intends to prepare for Brexit by building resilience and understanding within its organisation so that it can respond appropriately and effectively when the outcome is known.
7. Resourcing. In order to enable it to take the more interventionist approach described above, the Regulator intends to increase its headcount by 12% in 2018/19.
8. Adapting for the future. The Regulator intends to identify risks earlier and more effectively through its more proactive and targeted approach.

Practical Steps

Although these changes will not be implemented overnight there are some key steps that can be taken to ensure that schemes are prepared for the new regulatory approach.

1. Review your scheme’s governance model. The Regulator is keen to ensure that all schemes are effectively governed. If it is perceived that a scheme is not being effectively governed the Regulator will take action. Trustees should therefore take steps to ensure that they have reviewed their governance model and are happy that it is fit for purpose.
2. Contingency planning. The Regulator highlights the changing political and economic environment as a key risk. Trustees should ensure that their scheme is resilient to this changing landscape. They should consider if any actions need to be taken in relation to scheme investments, scheme funding and sponsor support and should have plans in place to deal with situations in the future as they arise.
3. Engage with the Regulator. Although the Regulator is keen to be more proactive, this can work two ways. If trustees or employers anticipate issues arising, early, clear and open correspondence with the Regulator can be beneficial in setting expectations and reaching acceptable outcomes for all parties.