For the benefit of the Committee, it is now in order for Members to take their jackets off.
We will now hear oral evidence from Mark Boyle and Stephen Soper, the chair and the interim chief executive of the Pensions Regulator. Before calling the first Member, I remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion that the Committee has just agreed. For this panel, I am afraid we have only until 9.30 am. Will the witnesses introduce themselves for the record?
I should like to ask two questions. The first is about the complexity of what you are being asked to do, and whether you think that increased complexity means there are likely to be issues. If there is joint regulation by your organisation and the Financial Conduct Authority, how will you ensure that there are no problems with the regulation?
The second question, to be slightly more blunt, is that as someone who has worked in the financial services world and experienced regulation of businesses, I know that the reality is usually that people at the top of regulatory businesses and regulators are of high quality. The people on the operational side are usually of significantly lower quality. I want to understand how you will make sure the people who are doing the regulation, as opposed to yourselves, will be of significant or sufficient quality to achieve what is necessary.
Mark Boyle: I will go first on that. Thank you, Mr Hammond. To take the first question first, the most important thing to say is that it is still very early days in understanding how the changes will work out in practice, particularly what that will mean for the regulatory framework. Clearly, we are as engaged as possible with all the parties, particularly through and with the Department for Work and Pensions, to understand how this will work in practice and the impact on regulation. As we work through that, clearly our understanding of what the impact will be will increase.
As to your point about there being joint regulatory responsibilities, the question whether there should be a single regulator or how two regulators work together is one that raises its head frequently and, not surprisingly, it has done so again in recent weeks. Our view on this is fairly simple. The regulatory landscape is primarily for Ministers, and it is for the Government to decide the most appropriate landscape. It is for us to make sure it works in practice. That means that although, clearly, we get our initial direction from DWP and legislation, we must work in quite a complex regulatory landscape not just with the FCA, but with other regulators. It is incumbent on us to work with all of them to understand where they are coming from to ensure that no gaps open up between us. We already have significantly strong relationships with the FCA, but in recent months—
May I ask a quick question? The thrust of my question—I understand the point for the Government—was about the two or three issues when you must make sure the gaps do not materialise.
Stephen Soper: In terms of the new legislation, clearly there will be differences in the way in which products and services are offered to members, either through the contract environment, which comes under the FCA, or the trust-based environment, which comes under us. The distinction between those two is very clear and they work very well together today, so this is augmenting what we already have and working with existing powers that we already have. There is no prima facie reason why we would not continue with the similar working relationships that we have at operational level. I feel quite confident at the moment, with the detail we have that this would work in the same way as it does now.
Shall I take the second question? On the quality of staff, the regulator has had a continued programme of bringing in external people on secondment from industry to keep our team fresh, and we have high standards for the people we employ. By way of example, we were able to dip into that resource pool and put in place an interim finance director, for example, so we have quite high-quality people in the area that you are talking about in assessing and working with businesses. The team is very well attuned to helping to make sure we fulfil the objective we were given earlier in the year of maintaining sustainable employer growth, but more broadly of how we act and have an economic effect on the businesses that are running schemes in our jurisdiction.
Mark Boyle: Finally, I have one postscript to that. I am only six months into the role. I have worked in central Government for six years and I have been extremely impressed by the quality of the people working within the Pensions Regulator. I think the organisation has done a very good job in attracting high-quality accountants, actuaries and lawyers. The calibre really is very high.
Good morning. May I ask, in the first instance, for your opinion of what the advantages and disadvantages are of collective defined contribution as opposed to individual defined contribution?
Stephen Soper: I am not sure, Gregg, whether I can answer on any advantages or disadvantages, but I think the challenges that need to be addressed are clearly going to be about communication to members and to firms of what in effect will be a set of new products, with different facets. The world is quite used to defined benefit and defined contribution, at the polar extremes. There is a big variety and a welcome variety, I think, of possibilities that come from this legislation. We need to see what forms that takes, but as a regulator we would be very keen to see that information about those products is communicated clearly, so that people understand what they are getting and, more importantly, they feel they are getting value for money.
Thank you for that answer; I shall come back to that issue with other witnesses. Perhaps you will be more able to reflect on this question. The Bill does not specify the form of collective defined contribution that is to emerge. Would you be prepared to reflect on the issues about different forms of collective defined contribution and what they might be?
Stephen Soper: We have seen two or three models overseas where this system is run. There are those with very clear payment conditions or contribution conditions but more flexible outcomes. There are those with fixed outcomes but more flexible payment conditions. There are some—particularly Denmark, for example—that run a system whereby they purchase annuities on the way to maturity. There are even other permutations that one might bring about. Canada is experimenting with some of those as we speak. We have an open mind as to the choice and selection of those models. They all have pros and cons. I think that those setting up the schemes, bearing in mind the interests of the members that they will hopefully be including in those schemes, should be picking choices to fit those needs. As long as we can see that kind of mechanic operating, we are agnostic as to which model it is—at the moment.
May I ask a final question? One of the issues about the different models of collective defined contribution, as far as I can see, surrounds the public’s willingness to pay for guarantees. The DWP did research that suggested that people were keen on guarantees, but when the Institute for Public Policy Research added to that research by asking, “Are you prepared to pay the cost of those guarantees?”, support plummeted. Have you a view—it may be a personal view, rather than a TPR view—on where that biting point lies between guarantees and the cost of those for savers?
Stephen Soper: I do not have a feel for that biting point at the moment. Absent any product proposals or further structure in the legislation, it is difficult for us to test where the market is likely to come out and therefore, for us, where the risks are that need managing, but there is an additional reflection I would add to your dynamic of the guarantee being free or being paid for. I think it is right that people like certainty, but a further dynamic of managing a portfolio is that a member does not need to look at it on a single-person basis. They are looking at it as a portfolio, and that typically makes it cheaper in terms of contribution, often offsetting some of the costs of the guarantee, so there is a way through, but until we see some proposals, it is difficult for us to comment further.
May I come in on the question of guarantees and outcomes for people buying these pensions? A question is raised by the insurance sector in particular about the way regulators allow them to invest in certain investment products. An example is infrastructure. I understand that if an insurer running a pension scheme wanted to invest in a series of solar panels for primary schools, with guaranteed returns, currently at inflation plus three, that would be quite difficult from a regulatory point of view. Do you think that regulations need to be altered to allow for more interesting types of investment that have quasi-Government guarantees?
Stephen Soper: I should like to split that into two technical levels. I think regulation of itself, as it is drafted today, does not preclude trustees of pension schemes from investing in those kinds of infrastructure project if they wish. At the technical level in doing that, there is a question mark about how one values those investments and how one marks to market or does not mark to market. That could be worthy of some consideration. On the other hand, trustees of schemes in very few cases are actually forearmed with the right skills and the right experience to make those investments, and one of the challenges here is how to get critical mass into either a pension scheme or a group of pension schemes to assist trustees in making those investments. I know that, for example, the National Association of Pension Funds and the Pension Protection Fund have been working on a product called the pensions infrastructure platform, which helps schemes put small investment sums into something that becomes more diversified. That type of structure is helpful. As far as I am aware today, we have no barrier to making those investments from a regulatory perspective.
Mark Boyle: Just one further remark on that, if I may, which relates back to the previous point. We imagine that in the collective defined-contribution space as it evolves, there will not be single products at all; there will be a range of different products. Just as there will be a range of different products offering different guarantees or otherwise, so we think that that gives space for different investment strategies. We see that as part of the “choice” part of the agenda.
The experience in continental Europe of collective defined-contribution schemes is, as Stephen hinted, mixed. There is evidence that in Holland it is declining. Many of the benefits of collective defined-contribution schemes have been weighed in terms of the reduced costs and admin, but what about the outcomes? What evidence have you got on outcomes improving things for members of the scheme?
Stephen Soper: At this point, we do not have evidence of outcomes improving things or making them worse. We have maintained an open watching brief until the legislation becomes a little more refined in terms of the sorts of structure and products it will allow. We would be quite happy to reflect on that when we get to that stage, but at this point I do not have those data to hand. We do not have them.
I wonder whether you have made an assessment of the likely take-up for shared-risk schemes and what impact you think that might have on the Pensions Regulator’s resources. Secondly, how will regulatory responsibility be shared between the Pensions Regulator and the FCA? Will one of those organisations take the lead?
Stephen Soper: If I answer in reverse, it comes back to the basic premise of whether the scheme is set up as a contract scheme or a trust-based scheme. As in today’s world, there are contract-based pension schemes that have been set up and are under the FCA’s remit, and we have trust-based schemes that the Pensions Regulator looks at and ensures safe harbour of. We do not know how these new structures will take shape yet, so I do not know which of us will regulate more or less, and for that reason I certainly do not have any statistics at this point on what the take-up might be. I cannot be more helpful than that, I am afraid.
Mark Boyle: However, what I would say is that your question about resourcing is absolutely spot on, because we need to think through very carefully what the resourcing requirements will be as we come to understand this better. That is something that we at the board will take a lead on—making sure that our limited resources are properly prioritised.
I wonder whether you would like to comment on clause 17, which proposes to remove the requirement for you to maintain a register of independent trustees. Currently, one of the positive things about trustees is that they have a fiduciary interest, and they are there to represent scheme members, who are their prime interest. Will removing that affect accountability and transparency and, most importantly, the confidence of scheme members who want to invest in such schemes?
Stephen Soper: The basis of the register, and the primary intention when it was first put into legislation, was for the regulator to be able to use a select group of trustees to appoint in cases of need, or in cases where our enforcement action had removed trustees from schemes. It is not a register of all trustees; it is just a register of those whom we use. In essence, the impact to us on the ground is negligible. We will still make sure we have a list—a panel of trustees—from which we have selected beforehand to use in those situations. It removes some very onerous conditions around the management of that list, and it is a very helpful deregulation from our perspective.
Stephen Soper: We will still publish, as we do now, any details around that list or around prohibitions of trustees that we currently undertake. We will maintain the level of transparency that we currently have. There will be no deterioration. It simply helps us to operate slightly more efficiently.
May I go back to Mr Boyle’s point a moment ago in answer to Mr Graham’s? You rightly said there will be a range of products. I think that that is inevitable because it will fill out with the market. There will necessarily be a range of investment strategies that will need to find how the product is structured. Over the weekend, I read a lot of the commentary from various people. Some of them suggest that you should play quite a close role in the supervision of investment strategies that trustees or scheme managers take up. Given there will be a range of products, that is surely an inappropriate role for you to take.
On that question—realistic targets for outcomes of products in collective defined-contribution schemes especially—how would you as a regulator set about assessing whether those targets are appropriate?
Stephen Soper: It is a complicated area. One has to conduct analysis similar to that which one conducts today when assessing whether technical provisions are correct for a defined-benefit scheme. There are different benefits being paid—different richness in the levels of benefit, if you like—but still the considerations are very similar. Where I think it becomes more—
Do you think such schemes that have targets necessarily have an additional layer of risk attached to them from a regulator’s point of view in assessing whether that target is realistic?
Stephen Soper: One needs to assess whether the contribution levels are correct. I agree that there is a level of risk. That is why I likened them to defined-benefit schemes. Although defined benefit is a much richer environment in terms of the benefits paid, any fixed-target scheme is similar in some of the considerations that one needs to make. There may be a smaller level of benefits, but the level is still fixed and there is still a promise that has been made. We need to work out how that member will get that promise, particularly where there is no further recourse to additional contributions.
Three quarters of respondents to the Government’s consultation on the Bill thought Government intervention would be necessary to achieve a scale such that guarantees could be offered by a scheme. We know that in other countries regulators have a role in promoting scale. Do you think that greater scale would be a benefit to UK pension savers?
Stephen Soper: In our view, scale is an advantage, depending on the genesis of some of these schemes: it may depend on whether they start small, are seeded in some way and can see a way of growing quickly to the requisite level. In other countries—Canada, for example—they have taken existing DB schemes and converted them, so they have bought scale by compromising existing benefits and switching across. There are many ways to get to the point where you have the right size of portfolio to get the sorts of benefit that can be achieved in collective and shared-risk schemes.
If you take it down to a very small number, it is difficult to see how a room of people such as this one could exist in a collective scheme: there is just not enough breadth in the age range, or any of the other factors that apply, to spread the risks or benefits across the pool of people. You need a large enough number of people to make it work, but without a product shape I would not want to put a number on that. However, scale generally is an advantage.
If a shared-risk scheme is exclusive to one very large employer, how is the level of viability for the success of the scheme arrived at? It will depend upon the number of employees who choose to contribute to that particular scheme. There must be a level below which there will not be viability.
Stephen Soper: I think that is probably right, although again I would not put a number on it. But that will promote the idea, which is not a new concept, of some form of multi-employer scheme. Without reinventing some of the ills and problems of the past with last-man-standing schemes that have existed, I can see that there are new ways of achieving a multi-employer scheme—a master-trust type scheme—where employers can come in with a smaller number of people to provide those benefits without needing to have the scale themselves.
In relation to oversight of the schemes, will you have any role in trying to work out which investment strategies are best—will you be providing that sort of support? Also, is return on investments something that you will be particularly focused on in terms of structure?
Stephen Soper: We have never been prescriptive with trustee boards about the investment strategy that they take. We are interested in it, because clearly there has to be a strategy and an approach that looks like it is going to succeed. We do due diligence over them, but mainly for those schemes that are struggling, as opposed to those that are clearly well funded. As I said, to date the only evidence that I can show you is what we have done in the defined-benefits base. They are similar methods, but we would need to see a product and a shape before I could talk in more detail about it. We would very much be interested in what is being offered there—again, in the absence of further detail saying that we should or should not be doing something.
Mark Boyle: We are primarily focused on the governance of the administration of schemes and on ensuring that that is correctly carried out for the benefit of members. Clearly, seeing that there are effective, appropriately capable trustees overseeing those investments is the line that we would take, rather than looking at the investments themselves.
May I just follow up on that? Clearly, there is a blurred line between governance, the actual quality of the investment managers and the strategy. You can get a situation in which there is no oversight of a scheme or a fund, and some very silly decisions can be made. If you are looking at trying to get pensions over a generation—40 years, perhaps—that could have devastating results. I am not sure that the level of comfort, in terms of oversight—
Stephen Soper: All trustee boards have to have a statement of investment principles. They have to set out what they are trying to achieve with their investments. We absolutely will look at that, understand what they are doing and be in a position to critique that if we feel it is wildly off beam. They will also have a review by an independent actuary, which will provide their view on whether those investments are performing to the relevant level; and we anticipate, although it is not defined here, some form of—
Order. Time has beaten us. That is the end of this session. I thank the witnesses for their attendance and the Members for their questions. We will now move on to the next panel of witnesses.