The Pensions Regulator Regulating defined benefit pension schemes. Response from The Pensions Management Institute

Transcription

1 The Pensions Regulator Regulating defined benefit pension schemes Response from The Pensions Management Institute

2 - 2 - Response from the Pensions Management Institute to the Pensions Regulator s consultation Regulating defined benefit pension schemes The PMI The Pensions Management Institute (PMI) is the professional body which supports and develops those who work in the Pensions Industry. PMI offers a range of qualifications designed to meet the requirements of those who manage workplace pension schemes or who provide professional services to them. Our members (currently some 6,000) include pensions managers, lawyers, actuaries, consultants, administrators and others. Their experience is therefore wide ranging and has contributed to the thinking expressed in this response. PMI s response New objective on sustainable growth Q1 Is our new objective on sustainable growth adequately reflected in the approach outlined in the draft consultation documents? If not, what more could we do to reflect the new objective? We agree that the new approach will better suit the changing needs of most trustee boards and scheme sponsors. It is right that the concept of sustainable growth will vary between employers it is right to identify explicitly the different objectives of employers in the commercial and not-for-profit sectors and this will help all stakeholders develop more meaningful approaches to funding. We would however question how the Regulator will balance the new objective with its other objectives such as protecting the benefits of pension scheme members and reducing risk to the PPF. For example, we suggest that the Regulator should put more emphasis in the code that the additional objective has been given to the Regulator in fulfilling its own role in relation to funding, and that trustees duties are unchanged; in some cases minimising the impact on sustainable growth could be contrary to a trustee board s trust law obligations in the context of the circumstances of their scheme. We also note that the Law Commission completed its review on the Financial Duties of Investment Intermediaries on 22 January 2014 and plans to issue a report in June of this year. Our expectation is that its conclusions will impact significantly on trustees approach to scheme funding and we are anxious that the Regulator show appropriate flexibility to changing trustee objectives. Q2 Is our interpretation of sustainable growth appropriate? (Paragraph 4-9 of funding policy) Subject to the caveat identified in our answer to the previous question, we are satisfied that the interpretation of sustainable growth is appropriate.

3 - 3 - Code of practice Q3 Does the practical guidance set out in the revised funding code reflect your experience of what good practice looks like? If not, why not? We are satisfied that the guidance appropriately reflects best practice, although we are concerned about its practical application in some areas (in particular integrating risk management and contingency planning), and whether there should be more recognition of proportionality in the work undertaken (for example, for a small scheme with a large strong sponsor), Q4 - Is the approach to risk management set out in the code useful? If not, why not? It is certainly true that the approach to risk management is detailed and comprehensive, and we support the concept. However, there is a need for pragmatism in acknowledging that risk can be managed but never completely eliminated. There are also circumstances when accepting a degree of risk may be an appropriate trustee decision. For example, should there be a greater recognition that the framework will not work for some schemes where it will be necessary to follow a high risk strategy simply to meet accrued benefits as they fall due? Q5 - Does the revised code provide sufficient practical guidance for trustees in relation to: a. Working with employers and advisers? We agree that the revised code provides appropriate guidance for trustees concerning their engagement with the scheme sponsor and advisers. However, paragraph 75 identifies the importance of trustee training in order to achieve and maintain the Trustee Knowledge and Understanding (TKU) requirement. Currently, there is no formal requirement for trustees to provide evidence of TKU compliance and we believe this is something which should be formally included in the annual scheme return. This approach would allow trustees to demonstrate compliance with paragraphs of the Regulator s code of practice with regard to trustees TKU obligations. It might be helpful to include practical examples in supporting guidance of how trustees can demonstrate that they have acted in an impartial and independent way. b. Assessing and monitoring the employer covenant? The new code greatly extends trustees responsibility for monitoring the strength of the employer covenant. Paragraph 85 requires trustees to examine the sponsor s business model with a degree of scrutiny that might reasonably be expected of a fund manager. We do not believe it is realistic or practical to expect a trustee board to analyse the sponsor s business to such an extreme extent. For example, most covenant advice covers prospects over a much shorter time horizon than a scheme s liabilities. The code should recognise and address the practical difficulties of obtaining medium and longer term views on covenant to feed into an integrated risk management analysis. c. Assessing reasonable affordability, including understanding the impact on sustainable growth? We are encouraged that the code recognises the importance of a balanced approach to funding. The principle of sustainable growth is important, and it is right to recognise that sustainability will have a different meaning for different employers. However, as noted in our response to Q1, the

4 - 4 - code should make it clear that the sustainable growth objective is an obligation on the Regulator and not trustees. d. Their investment strategy? We are satisfied that the code s approach to trustees investment is appropriate. However, it would have been helpful to have included explicit acknowledgement of the role of Socially Responsible Investment (SRI). We would again draw attention to the issues raised in our response to Q1. e. Technical provisions and recovery plans? We are satisfied that the code s approach is realistic and pragmatic. However, should there continue to be a reminder of regulation 5(4)(d) (ie the statutory requirement that any change from the method or assumptions used on the last occasion on which the scheme's technical provisions were calculated must be justified by a change of legal, demographic or economic circumstances)? f. Any other issue not mentioned above? No comment. Q6 - What, if any, significant additional administrative cost does the revised code impose on schemes and employers? As noted in our response to Q5b, we believe the Regulator s expectations concerning covenant assessment are excessive and disproportionate and would be costly for trustees. In particular the burden on boards of small schemes would be particularly onerous. It appears that this guidance has been geared specifically to larger schemes, and we would argue that consideration should be given to the financial constraints affecting smaller schemes. This may be mitigated to an extent depending on what the Regulator will accept as being proportionate to the circumstances of a scheme. Regulatory strategy Q7 - Does our strategy, focused on protecting accrued rights to benefits through adequately funded and supported and well governed DB schemes, with risks identified and mitigated in a proportionate and balanced way, reflect the proper balance of all our objectives? (Paragraphs 5-13) The strategy is appropriate. Q8 - Where risk has already crystallised, should our focus be on managing the impact of that risk to achieve the fairest and best possible outcomes in the circumstances? (Paragraph 13) We agree that this is the right approach. Funding policy Q9 - Do you agree with our priorities for the regulation of DB scheme funding? (Paragraph 14) We agree that the priorities are appropriate, although it would be helpful if the code could also indicate the relative importance of each priority.

5 - 5 - Q10 - Is our risk assessment approach, focusing on key areas of covenant, funding, investment and governance risks, useful? If not, what other areas of risk should we focus on? (Paragraphs 21-30) We agree that the approach to risk assessment is pragmatic and covers the principal areas. Q11 - Is our approach to segmenting the landscape by covenant in order to tailor our policy and operational approach appropriate? If not, what would be a useful way of segmenting the landscape? (Paragraphs and Appendix A) We are satisfied that the approach to segmentation is appropriate. Q12 - Is our proposed policy focus for the different covenant strengths appropriate? If not, why not? (paragraphs and Appendix B) We agree that the proposed policy is suitable. Q13 - We use a broad suite of risk indicators to assess scheme risks in the round. Is this the right approach? If not, why not? (Paragraphs and 48-49, Appendix C and D) and Q14 - Do you think that our proposed Balanced Funding Outcome indicator is useful to: a. Measure risk in the system? b. Inform our approach to prioritising schemes for further investigation? c. Inform our approach to measuring our impact? (Paragraphs and Annex C) We are concerned that the Balanced Funding Outcome (BFO) concept is somewhat arbitrary and compromises trustees discretion with regard to assessing their scheme s appropriate funding level. A funding regime should in our view be specific to the scheme concerned, and, if trustees can demonstrate that they have approached the valuation process in an appropriate manner, the BFO should not be necessary. We note also press comment that the BFO could become a new MFR. Q15 - Our policy for targeting our resources where we can have the greatest impact takes account of the level of risk, including scheme size. A greater proportion of our interventions will, therefore, be in larger schemes, with smaller schemes generally being regulated through education and other targeted approaches such as portfolio reviews. a. Is it right that our risk bar for intervention takes account of the level of risk posed by schemes and their size? The approach implies a correlation between scheme size and risk. This in turn suggests that the risk being managed by this approach is the Regulator s rather that of trustees. b. Is education the most effective and proportionate way of regulating across a diverse landscape? (Paragraphs 52-53) Given PMI s role, we must declare a vested interest. However, we believe that education has a pivotal role in effective regulation.

6 - 6 - Q16. Is proactive engagement an effective way of engaging with schemes and targeting our resources in order to achieve balanced outcomes? (Paragraphs 58-60) Proactive engagement will be effective provided that the criteria used for risk assessment are appropriate. Q17 - Is our proposed approach to measuring the impact of our regulatory approach appropriate? If not, do you have any suggestions? We are particularly interested in your views on how we should be measuring success against our new objective on sustainable growth. (Paragraphs 82-85) Other than the BFO indicator (see our response to Q13 and Q14) we are satisfied that the proposed approach is appropriate. Any additional comments Q18 - Are the documents structured and drafted in a way that makes it easy for you to understand the key messages and issues? How could they be improved? The sheer volume of material provided is a potential obstacle. The length will be off-putting to many trustees, and it is possible that different people will come to different conclusions on key messages even after a detailed read. The code should be much shorter and confine itself to principles, supplemented where necessary with more detailed guidance. Q19 - Are there any other comments which you would like to make on the proposals contained in these consultation documents? No. We suggest thought is given to producing further guidance of the Regulator s expectations for those valuations where significant progress has been made when the new code is issued. ***** ***** *****