On statutory override, do you think the right balance has been struck of flexibility for employers to make changes versus some security of expectation for employees in the schemes?
Bill Galvin: Our primary concern would be that the operation of the statutory override provides trustees and employers with a straightforward discussion about how to ensure that members have appropriate protection through the discussions that will have to go on. The application of the statutory override is something that each scheme will have to work through, depending on their specific circumstances. We heard from the NAPF that there are some very specific circumstances in individual schemes that will make some of those discussions relatively complicated.
Bill Galvin: I do not think that we can reasonably comment on public sector schemes. We do have a role coming in the regulation of public service pension schemes, but that does not start until 2015. We are in the early stages of understanding some of the challenges in that space that have not traditionally been in our remit.
We have heard in both evidence sessions today concerns about people who currently have a good scheme being forced automatically to go into a scheme that is more expensive or not performing as well. What is your view of people’s likelihood of ending up in a poor scheme under the new proposals, compared with what we currently have? Is it more or less likely, or about the same?
Bill Galvin: The arrangements for automatic transfer of pension pots and the proposals for the quality of schemes that will underpin those arrangements are intertwined. In our view—we have said this publicly—there is a wide range of pension schemes currently in the market in both trust and contract styles of provision. We do not believe that, universally, all those schemes currently meet the standards that will be required—in terms of administration or governance—to support a project as ambitious as automatic enrolment.
The setting of quality criteria that would underpin the schemes that will be used for automatic transfer of pension pots will be a significant process of saying that, in order to play in the automatic enrolment game, there needs to be a minimum standard to protect members as they are being transferred between schemes.
Building on that conversation, Bill, how great a regulatory challenge do you believe it will be to ensure that all schemes are of such a standard that no one, as their pension is automatically transferred, pot to pot, from one scheme to another as they move job, is transferred into an inferior scheme?
Bill Galvin: The pot follows member proposals need to be fleshed out in further detail in the regulations, in terms of the precise nature of the approach to consolidation of pots and the operational infrastructure that will sit underneath that.
It appears to me that we are essentially looking at three options going forward. One is that we have 50 million small pots by 2050 and that is clearly not a very attractive proposition. A number of years after the introduction of automatic enrolment, the Australians found that they were left with a problem in that space. There is an opportunity to sort that out prospectively at the point that we are at in automatic enrolment.
I do not think that we should underestimate some of the challenges in terms of implementation. There are a number of options on the table, one of which is the use of a database, which is anticipated by the legislation. The creation of such a database would be a significant challenge for the industry, which would start with strict rules for those people who could play in the provision of data and the searching of the database. That would require much higher standards of data than we have currently in pensions schemes, and the setting of those standards. That would be a significant undertaking for the industry, as your previous witnesses laid out.
The other proposals might involve an imposition on the member or the employer to provide details that the member would take from one employment to the next, and would then be initiated by the member or the employer. Again, that would provide an extra burden on a different part of the industry—members or employers—and might result in lower levels of compliance.
Whatever road is chosen, there will be challenges, but the prospect of 50 million small pots by 2050 should mean that one of those challenges needs to be taken on. One of them will require a burden on employers or members, and one of them will require the industry to be significantly better in its standards of data record keeping and the processing of transfers.
You mentioned the Australians who, looking back, realised that they had got this wrong. Would you share with the Committee the model that the Australians are going for to address that problem?
Secondly, the database is clearly complicated, difficult and expensive on one level, but do you see any potential upside, either in terms of driving up data quality in schemes, which is something that I know you care about as a regulator, or through virtual aggregation, bringing all your pension information into place and smooth-lining transfers? Is that somewhere where we always ought to have gone?
Bill Galvin: To answer the second part of your question first, we have been pushing quite hard to improve the standards of data and record-keeping in the industry for some time. We have had some success, but it has to be noted that we were starting from a relatively low base. We set out some standards for the presence and accuracy of data for members back in 2009, and said to the industry that, by 2012, we would like it to be in a better space ready for automatic enrolment. We found significant improvements, but still fewer than two thirds of members have the standards of data, accuracy and completeness that we set out.
It therefore seems that the industry needs to improve its performance in administration, record-keeping and the execution of transfers. We know that many of the smaller schemes struggle most significantly in this space. They struggle to find resources to invest in the standards of administration that are required; they struggle to find the time and governance effort to rectify problems that have existed in the past. It does seem as if the way forward in this space is to ensure that quality standards are outlined that set a minimum for schemes.
The impact of that policy will be that some schemes will recognise that they cannot play the automatic enrolment game to the standards that are required. They will have to find ways in which to merge or amalgamate with other schemes, or employers will have to find an alternative solution for their employees. Automatic enrolment is a game-changer for the industry in both standards of administration and governance, and the quality standards will underpin the automatic transfer arrangements and set out exactly where the bar is in that game-changing proposal.
Bill Galvin: I do not think that the Australians feel that they have this sorted. They have proposals on the table that were first about providing members with better data about their pots and, secondly, about arrangements for automatic transfer between the schemes. It has been some time since I looked at it. I have not looked at the detail of their proposals. Steve, you might know them better.
Clause 32 removes the facility to refund pension contributions to employees who are only in the scheme for a very short time. The employer’s contribution will be retained within the scheme. How much damage will that do? Do you think that it will do any damage to the pension fund as a whole?
Bill Galvin: Will this damage pension funds? The short answer is no. As your previous witnesses have said, short-service refunds exist only in the trust-based space. Contract-based schemes operate without short-service refunds. Certainly, some employers will find that it will cost them more money to service the same population, but the policy for automatic enrolment is that members should benefit from their savings, from the point of joining the employer, and this reinforces that policy.
All I am saying is that, if there were to be a reduction in the amount of money actually in the pension fund, it could have difficulty as far as pay-out is concerned in the future.
At the moment what happens is that the refund of pension contributions can actually take place. That will not happen. It will actually protect the pension fund, will it not?
Bill Galvin: The pension fund will have more money if it is not making refunds to members. Of course, it may have many smaller pots for members who did not stay in the fund for a very long time and moved on to other employment. This needs to be seen in the context of the proposals about automatic transfer of those smaller pots so that they follow the member.
Do you have concerns about other technical changes to workplace and occupational pension scheme regulation as set out in the Bill, including those affecting automatic enrolment schemes?
Bill Galvin: We wholeheartedly endorse and support the technical changes that the Department is introducing in both primary and secondary legislation to make some simplifications to the automatic enrolment process. They are very sensible proposals to make it easier for employers to carry out their requirements.
This is a marvellous opportunity to ask the question to which unfortunately we did not quite hear the answer from the previous witnesses. Bill, as the pensions regulator, you will now have an additional task: to minimise any adverse impact on the sustainable growth of an employer. How do you feel about this? Is it clear enough? What concerns, if any, do you have?
Stephen Soper: We welcome this change. We have always taken the view that a thriving employer is the best form of support for a pension scheme. We have three current objectives already which we balance against one another. This fourth objective will feature as part of that suite of balancing acts. We hope to take this out through consultation to the market so that we can be more transparent about how we achieve that balance. In overall terms it should lead to a far better outcome for both members and employers.
I was just looking at what changes to the arrangements are in the Bill. Perhaps you would like to comment on the safeguards you see for pension protection arrangements at the moment.
Bill Galvin: The provisions on the protection of member benefits that will emerge from the Minister’s potential ability to cap charges and to ban consultancy charges will certainly mean that some of the potential for the more extreme forms of poor behaviour from the industry will be mitigated. In particular, the banning of consultancy charges will mean that an area that has the potential to be abused by people entering it without members’ interests to the fore will be removed. The challenge there has been that the industry hasn’t quite demonstrated in all parts that it’s prepared to enter into the spirit of automatic enrolment in a way that would give the Government and us confidence that when we get down to the smaller employers, where there tends to be a less engaged purchaser and a less engaged consumer, there will be adequate protection from people who might look to profit from those arrangements.
Bill Galvin: There are various provisions there that will assist with the operations of the pensions regulator. For example, clause 40 allows us to prohibit directors of corporate trustees; we currently have the ability to prohibit individuals from acting as trustees, but where an individual is prohibited from acting as an individual trustee there is no prohibition on that same individual becoming a director of a corporate trustee and performing essentially the same role. So there are provisions of that nature that streamline and close some loopholes in the legislation that currently governs the operations of the regulator.
The previous witnesses, particularly the NAPF representative, set out a view of how in the next decade or so the scheme side of the pensions industry will consolidate. You, if I have picked up on your comments correctly, think that is likely to happen too. First, am I correct in thinking you believe there will be consolidation on the scheme side? If so, what do you think the implications of that consolidation are for auto-enrolment in particular?
Bill Galvin: Not only do I believe that there will be a consolidation; it is important that there is. We have made it clear that smaller, trust-based schemes in particular are less likely to have the standards of administration in the hard delivery of transfers and record-keeping requirements, or the standards of governance, to make sure the schemes remain suitable. So it appears to us that consolidation would be a good thing.
John Kay, in his recent review of the equity markets, said that regulators should primarily be focused on market structure issues. When we look forward to 2023, and to when automatic enrolment is finished, if we have an industry that is of the optimal shape to deliver some of the really challenging aspects of automatic enrolment, such as automatic transfers, everything will be much easier. If there are many smaller schemes, I think things will be much harder. Of course, the challenge is that we need an industry that has sufficient players to remain competitive, but not the long tail of small schemes we have at the moment.
I think there are a number of levers for making that happen. One is to set standards for schemes in basic areas like administration and governance. My hope is that the regulation that will underpin some of the provisions in this legislation will go towards setting those standards. The other is educating employers who are purchasing schemes about what “good” looks like, and how to go about selecting a good scheme on behalf of their employees. We are doing a significant amount of work in both those areas—the education of employers, through our automatic enrolment programme, saying, “This is what you should look for when you are purchasing a scheme, to make sure all these things are in place”; and we set standards for trust-based schemes through a code of practice that we have consulted on, and some guidance that we hope will play its part in driving up the standards in this space. I think all those things will mean that we will have a different, more consolidated market at the back end of automatic enrolment.
Bill Galvin: There are a number of reasons why it is difficult to provide good outcomes if you do not have scale. One is that the governance and administration costs tend to be quite expensive per member when they are performed to a high standard. Another is that the market power of smaller schemes tends to be much less; the bargaining power into the financial services industry tends to be much less. Bigger schemes can get bigger bang for the buck.
One of the potential ways in which automatic enrolment can rejuvenate the pensions industry is to have a similar effect as happened in the consumer products industry, for example, where the power in that value chain moves from the large branded producers of consumer products down to the supermarkets, which are closer to the customer and had a much bigger impact on the price and quality of products provided to the customer. I think that if we have large-scale institutions operating close to the member and in their interests, they are in a better position to demand good-quality services from their suppliers and from the financial services industry, and to move the power in that value chain closer to the consumer. I think all those things would be good.
We see that in the Government’s direction of travel in local government pension schemes, where there is a lot of talk about scaling them up for precisely this reason. Would that be a fair analogy?