Overview of Pension Regulation in the United Kingdom: Trends and Challenges

1. Pension regulation in the United KingdomTony HobmanChief Executive, the Pensions RegulatorWarsaw, September 2006

2. UK pensions: the landscape

3. The UK pensions landscape • Large numbers of occupational schemes • circa 10,000 DB or hybrid schemes • circa 74,000 DC schemes, most of which are small BUT … • Most members belong to large schemes • over 85% of member records are in 1,600 large schemes

4. Biggest proportion of members is in large DB … 17.3m private sector scheme member records in total 86.5% of member records are in large DB / hybrid Source: The Pensions Regulator (Pension schemes in the UK, 2005)

5. … but biggest proportion of schemesis small DC 85% of schemes are small DC 84,600 ‘live’ occupational private sector schemes in total Source: The Pensions Regulator (Pension schemes in the UK, 2005)

6. The UK pensions landscape • The trend is from DB to DC • very few new schemes registered in the UK since January 2000 are DB • it is possible that by 2012 there will be equal numbers of active DB and DC members BUT … • DB membership (especially deferred and pensioners) will remain significant for many years to come • DB assets in UK are circa £700bn (over €1,000bn)

7. Active membership in private sector occupational schemes (millions) 7.0 6.0 5.0 Prediction >> 4.0 3.0 2.0 1.0 0.0 1979 1983 1987 1991 1995 2000 2004 2008 2012 2016 DB membership DC membership Active DC membership is growing…

8. 20 15 Membership in millions 10 5 0 1995 2000 2004 DB active DB deferred / pensioner DC active DC deferred / pensioner … but even with the shift to DC, DB will remain important

9. The risks

10. What are the main risks to scheme members? • DB • underfunding • avoidance • DC • administration • members’ understanding • All schemes • trustee competence • investment • fraud

11. 2005: A new regulator

12. The new regulator • Before 2005: the old regulator (Opra) • emphasis on compliance • limited powers, reactive • New legislation in 2004 • April 2005: the Pensions Regulator is created • risk-based • wider powers, proactive • Pension Protection Fund also created

13. A new regulator • Our objectives • protecting members’ pension benefits • raising standards • reducing risks to the Pension Protection Fund • Our approach • identifying risks • providing support, preventing problems • education and guidance • intervention when required

14. Our regulatory powers • Gathering information and identifying risks • the scheme return • ‘whistleblowing’ reports • ‘notifiable’ events • DB recovery plans • Preventing problems and putting things right • improvement notices / third party notices • recovering unpaid contributions • freezing orders • disqualifying trustees

15. Our regulatory powers • Taking action against avoidance of, or insufficient support for, DB liabilities • contribution notices • financial support directions • issuing clearance for corporate transactions

16. Looking back: our first year 2005 – 2006

17. Main themes for 2005 – 2006 • Developing a risk-based approach to regulation • Helping to support scheme funding • Working with the PPF to protect members from employer default • Working to raise standards: codes of practice, guidance, training materials

18. Developing a risk-based approach • Categorising risks • level and nature of risk • number of members potentially impacted • Collecting data • environmental scanning • reports from and about individual schemes, intelligence • the scheme return • Appropriate use of resources • when is active intervention appropriate?

19. Spotting a needle in a Haystack (MI5 Intelligence) Must win the War (Active Intervention) Intelligence based action ActiveIntervention High priority Medium priority Risk Low priority Bobby on The Beat (Proactive Monitoring) Educate & Support (Very Light Touch) Minimal scheme specific action Proactive Monitoring Size The risk and intervention model

20. Supporting scheme funding • DB underfunding presents a potential risk to scheme members • Trustees and employers must develop prudent funding targets / recovery plans suitable for their schemes • We use risk-based filters to review recovery plans • Problems must be reported to us (e.g. failure to reach agreement)

21. Clearance: protecting scheme members • Corporate activity has the potential to put members benefits at risk • We can take action if • there has been deliberate avoidance • a scheme is not properly supported • Optionally, companies can apply for clearance

22. Raising standards • Codes of practice • help trustees, employers, advisers etc to understand their responsibilities • have evidential status • subjects include ‘whistleblowing’, funding, late payments • Other guidance, eg on cross-border schemes • ‘The trustee toolkit’ • online learning for trustees • free, available to all

23. What next? 2006 and beyond

24. Main themes • Continuing to support the process of scheme funding • Improving standards of governance • Tackling risks to DC scheme members

25. Getting a clearer picture • Policy must be based on • high-quality, up-to-date information • consultation with the regulated community • Governance survey • independent, anonymous • Key findings include: • smaller schemes more likely to need support • importance of training • need for risk management • need to manage conflicts of interest

26. In conclusion … • A new risk-based regulator • Emphasis on education and prevention • Stronger powers to • gather information • take action • set standards • DB funding a key focus: we are equally concerned with DC issues and governance overall