Nausicaa Delfas – TPR CEO
Jeremy Hunt talked to a group of pension fund executives yesterday morning. The event was closed, all we know of it is that it took place in the Mansion House. Apparently, invites were knocking round Legal & General, because the Legal & General executives who didn’t go, were at an event I was at the following afternoon. As a general comment, if we are to have public announcements, can they please be democratised?
What Hunt said appears to have been an apology from Government about the botched management of the HS2 project. The implication is that private/public partnerships can work, though we have seen precious little evidence of that in pensions. The botched IT project detailed by Nest yesterday is just one of a number, most surrounding the inept management of the pension dashboard project.
We all know that change is driven by entrepreneurial activity and the best that Government can do is to let it happen. Which is what Nausicaa Delfas appears to have told her audience. Jo Cumbo’s tweets are pretty reliable so I take this thread as having considerably more importance than the Chancellor’s “mea culpa”.
Speaking at a City pensions summit today, Nausicaa Delfas said the new DB funding code would also clarify that “all schemes can invest in growth assets, with much greater flexibility for open schemes and those further away from their end game.”
— Josephine Cumbo (@JosephineCumbo) October 25, 2023
Is the Regulator for turning?
To date, we have had a number of statements from Nausicaa Delfas , TPR’s CEO , to the effect that we need a new regulatory mindset. The existing mindset is “risk-based”, though the definition of “risk” is such that it denies “opportunity”.
The policy intent is at odds with the application of regulation through the bulk of TPR’s 1000+ staff. The application has focussed on getting DB schemes to “buy-out” or self-sufficiency so that the PPF is protected from the pensions impact of corporate insolvency.
But these tweets and the speech that Delfas are the first clear signal that the DB funding code, as it has been sold to us for the past five years, is effectively dead and that the Regulator is now focussing on putting our defined benefit pension schemes to work and not to bed.
A new mindset means a regulatory u-turn
There are a number of projects within the Mansion House reforms which require a change in position from the Pensions Regulator, to make progress
The consolidation of small DB funds needs TPR to redefine the gateway through which schemes can reach out to consolidators, clarify capital rules for superfunds and agree with potential consolidators a means for them to make money. We are now several months on from the Mansion House consultations and we should expect some progress if this project is not to stay “mothballed”.
CDC has become atrophied around one arrangement, which has yet to announce its launch. Whatever the “tax-problems” that are holding up progress, they need to be fixed so that CDC becomes a thing. TPR’s CDC code seems to have stood in the way of any further schemes coming forward. It needs major revision, While the signs are that we are moving on to the next stage of CDC, stage one looks botched.
The third major initiative , the value for money framework, is also awaiting a regulatory revamp. Value for members , as proposed by TPR has been a failure. Like the FCA’s IGC VFM assessments – it has allowed each scheme to define VFM in its own way, rendering the concept of VFM practically useless. The VFM assessment could change that and could drive meaningful change over time. So could the additional small schemes general levy which could render the majority of the 27.000 DC schemes TPR schemes unviable.
If the Government are to take a wrecking ball to the DC scheme legacy, then there needs to be a brave new world of DC schemes fit to retire from. There was some mention of how such scheme could develop in the report of Delfas’ speech.
BREAKING: UK pensions regulator to issue new guidance for DC pension schemes on investing in private markets. This is expected by the end of the year.
— Josephine Cumbo (@JosephineCumbo) October 25, 2023
Whether this makes a substantive difference to default allocations is open to question. The current system could best de described as “illiquids for show, passives for dough” with some commercial DC schemes putting sexy defaults in the shop window while competing for mandates with low cost defaults in a race to the bottom.
If there is to be a fundamental change in the way that DC schemes deliver value, then we need to see a change in the purchasing dynamics of employers who determine the destination of their staff’s financial savings. This will mean creating a purchasing paradigm radically different from the one today.
What was Nausicaa Delfas saying yesterday?
When your audience includes the Chancellor of the Exchequer, it is likely that you will say what he wants to say, certainly if you are a senior agent of the Crown. It would be easy to see Delfas as “sucking up” to the boss.
But I have hope that she does have the energy and courage to see through a change in mindset at TPR. Because the old mindset has led to atrophy in key projects – scheme consolidation, the provision of pensions from DC saving and the resumption of investment in the growth of the UK economy.
There are two major events happening in November which will define whether the Mansion House reforms make an appreciable difference to the private pension system.
The first , on November 7th is the King’s Speech. Hunt’s presence at yesterday’s Conference makes the odds of their being a pension bill to move VFM,CDC and Superfunds on, seems a little bit more likely after yesterday.
The second is the Chancellor’s autumn statement on November 22nd when we will learn what the Treasury is likely to be doing to incentivize change in pensions. While we can only speculate, the Pensions Regulator’s remarks sound to me like a bell-weather of likely change. The DB funding code is currently in dispute between rival regulators and rival departments. If we are seeing a genuine shift in the direction of the DB funding code, I suspect we will see more general progress.
On that slender thread, I base my optimism that we will see better retirement income emerging from all this noise.
What was Nausicaa Delfas not saying yesterday?
She did not mention that the Pensions Regulator doesn’t regulate the “funding” of their staff pensions. She did not mention that like 5m other deserving public sector workers their £2tn of unfunded index linked pension benefits are based on assumed economic growth (GDP). She did not mention the unattained historic GDP growth (CPI+3%) means a huge intergenerational transfer of liability to future taxpayers.
This is a genuine question because I simply do not know and I am hoping someone with greater experience can enlighten me.
On DB Scheme funding, does TPR consider pension scheme benefits other than the scheme annual pension in retirement and require buy-outs and potentially consolidators to protect those benefits?
I am particularly thinking of ill health early retirement provisions – which depending on Scheme Deeds may well be still available in some form to deferred members.
Also Death in Service benefits, which was an emphasised selling point for pension scheme membership to younger employees, might continue to be available to deferred members still in employment with the sponsoring company.
I should perhaps have added that I am aware that many employers made alternative arrangements for these benefits when they closed the pension scheme to accrual e.g. by separate insurance policies for PHI and DIS benefits, but there may still be residual rights left in the pension scheme.