Jo Cumbo’s meeting with Nausicaa Delfas

This interview  is the clearest evidence yet that there is a new mindset within TPR.

Because I don’t have enough free links to offer direct access , I will share a PDF of Jo’s write up . Careful navigation and strong eyes will lead to a good read.

Much of the article concerns itself with the Mansion House Reforms and the Pensions Regulator’s role in ensuring they happen.

As we know from Jeremy Hunt, Nicholas Lyons and Laura Trott , there is no intention to mandate a new approach to investment of pension assets. The aim is to get £75bn more of our money into productive capital but that’s by nudge not law.

The part of the Pensions Regulator is to put pressure on Trustees to deliver value for money, not to invest in private assets.

“Trustees have a duty to savers to act in their best interests. That means properly considering the full range of investment options.” – Nausicaa Delfas

But if a Trustee is running an asset allocation strategy that has the scope to invest for value, but isn’t, the CEO of the Pensions Regulator says her teams will act.

“We expect that those schemes that have the scale and expertise are able to invest in a diverse range of assets,”

she said, adding that “productive finance”, such as illiquid investments, start-ups and growth assets, had a part to play in a diversified portfolio.

Clearly, some of the more sophisticated investments cost more, but our view is that even now, even within schemes are not actually using the full range of costs (available to them).

The challenge of the last decade was how to get people saving. And now the challenge for us is how do we make sure that they get the right value from their savings.”

This is what I have called the “difficult second album”. If you are too small to access valuable assets, then you should consolidate. If you are large enough but tuck your money under a mattress, you will be found out.

My meeting with Nausicaa Delfas

I had my own interview with Nausicaa Delfas and her team in her green but inaccessible new offices in Brighton. I am not going to report what she said but can confirm that in tone and content, it was in line with her interview with Jo Cumbo.

After speaking with Edi Truell, who has also been in touch with TPR’s CEO, I got this stark message from the disruptive financier

 ‘get with the programme or you will be consolidated or wound up’

This is the mood music in the City of London and I am quite sure it will be ringing alarm bells. We have a disruptive Government and a disruptive regulator.

Corporate DB schemes must be part of the program

Yesterday USS’ report and account , confirmed what its 2023 valuation has told us. It tells us that the scheme lost 18% of its assets (£16bn) while its DC scheme confined its losses to 0.9%. USS , whose current CEO was a predecessor to Delfas as CEO of TPR, has been pursuing a DB investment strategy that includes a £30bn allocation to LDI. It’s DC schemes uses the same assets but has swerved LDI.

In combination with other DB schemes , an estimated £600bn of assets were lost in 2022, that’s eight times the target of £75bn set by the Chancellor to invest in productive finance by the end of the decade.

Most of this £600bn was spent to maintain hedges in place so that DB schemes could afford the reduced discount rates on liabilities that would follow if interest rates returned to QE levels. The purpose of immunising schemes in this way is to insure against nasty surprises to scheme sponsors, the PPF and members.

In her interview with the FT, Delfas questions whether many occupational pension schemes have the competence within their trustees and advisers to manage such substantial assets. But trustees would be right to retort that they were only following the Pension Regulator’s orders.

Schemes such as USS, need have no endgame, no LDI and the optimistic mindset of LGPS.

The new mindset must extend to DB

While I am in agreement with the tough approach being adopted to change the mindset of our DC scheme fiduciaries  , it must be accompanied by a change in mindset by TPR about the levels of risk DB schemes can take going forward.

Specifically TPR should be providing the DWP with feedback on the ideas put forward by the industry to ensure that corporate DB plans are used for productive purposes without compromising member security.

1. We need to make it easier for schemes such as USS and Railpen to invest for the future with the freedom of their DC schemes. They should not be constrained.
2. We must allow small but well funded DB schemes who don’t want to stay open , to choose from insurers and consolidators going forward.
3. We must make it easier for failing DB schemes with weak sponsors to use capital backed journey plans and last man standing schemes to see them through to consolidation
4. The PPF should change from being a lifeboat to a consolidator, and offer to enable DB schemes wishing to stay open, fuller protection in return for a super-levy

And the mindset must consider paying  DC pensions

Finally, TPR must start thinking about “DC pensions”. Whether you call it CDC or something else, people need a better way to turn their pots to a pension than an annuity and an easier way than  drawdown.

So my message to Nausicaa Delfas is to be bold, keep on your  warpath. Don’t be constrained by the past and fight for all occupational pension schemes to invest productively , deliver value for our money and pay proper pensions.