I’m afraid it’s not newsworthy – so will carry little coverage – but the session of the Work and Pensions Committee involving Nausicaa Delfas, Neil Bull and Louise Davey passed off without any great drama and the three people giving evidence acquitted themselves very well.
This has not always been the case when TPR top-brass have appeared. But save for some exceptional items (the covenant examination of USS and the failure of TPR to meet a deadline on its plan to regulate the privacy of electronic communication), the Pension Regulator had answers to questions given which satisfied the Committee. In as much as the Committee represent the sort of layperson’s scrutiny we would expect from informed citizens, this was something of a triumph.
What was most remarkable about the evidence given , most notably by Nausicaa Delfas, was the downplaying of the “protection of the PPF” in favour of a new objective “protecting the consumer/saver”. We were told that 80% of TPR’s DB schemes are now notionally in surplus and that while a DB code will be in place by April 2024, (effective for schemes with valuations from August 2024), it has been rewritten to align with the thrust of the Mansion House reforms and the Autumn Statement’s comments on pensions.
A recurring theme from both Delfas and Davey was that “buy-out was not the only option”. MP- Nigel Mills asked whether trustees were being bullied into buy-out and Delfas made it clear she expected trustees to evidence they were considering all options including run-on (with or without a capital backed journey plan) and the potential to be consolidated as the market grew. At this point of the session my notes say
UNRECOGNOSABLE FROM PREVIOUS SESSIONS
Disparities between ONS and PPF assessments of 2022
Rather less satisfactory were the explanations from TPR over why the PPF/TPR numbers for changes in scheme assets (a loss of £400bn), differed so markedly for 2022 than for those of the ONS (£600bn).
TPR stuck by their lower assessment of loss , suggesting a sampling error from the ONS. This will not please the data scientists (Iain Clacher and Con Keating) who have come up with numbers adjacent to the ONS. The WPC did not appear satisfied with the explanation, although it was in lockstep with the PPF’s testimony earlier in the month.
Listening to Neil Bull’s explanation suggested that the lessons of 2022 (the LDI debacle as Stephen Timms called it) are still to be learned. We are still hearing the mantra of “perfect hedging with its vison of every downward pressure on liabilities will lead to an upward pressure on assets (and vice to versa). This does not account for the different views of the loss of assets in 2022. This view is a legacy of “Old TPR” an organisation whose mantra was “risk aversion” and not the very different views expressed by Davey and Delfas.
USS – an ongoing bone of contention
Nowhere , did the doctrine of de-risking have more impact than in the USS, who by rigidly adhering to rules rather than common sense, were forced to drive through cuts in benefits which later had to be fully reversed. The casualty of this barmy enforcement of barmy regulation were ongoing strikes and loss of learning for a generation of students.
Stephen Timms pointed out that even now, TPR is requiring the covenant assessment on the USS employers (universities that have typically been in place over centuries) be made over 20 rather than the proposed 30 years. Do we really expect there to be a chance we will lose our universities in the next 20 years. TPR were sent away to consider why the USS continued to be under pressure to “de-risk” against that possibility.
A Regulator on the cusp of transition
For the bulk of the session , the Pensions Regulator was being questioned about its capacity to adopt the new mindset its CEO is urging upon itself.
The discussion continued to focus on DB and particularly on the struggle to carve out a space for consolidation. Capital Backed Journey Plans were explicitly described as a bridge to superfunds , superfunds were capable of being authorised by the Regulator and we were told that they would be given new guidance on “capital extraction”- (not profit extraction) shortly.
The LCP proposals for a super-levy to be paid to the PPF for larger schemes wishing for a safety net that promised 100% protection was not dismissed. Oliver Morley’s description of it as an “expensive sledgehammer to crack a nut” was not endorsed. The PPF was considered a credible candidate to consolidate small schemes
As regards DB funding, the Pension Regulator talked a good game of being on its game, capable of standing up to scrutiny for its scrutiny of covenants, journey plans and superfunds and an enthusiastic promoter of the mansion house reforms in principle and practice.
DC the bigger risk
When questioned about the biggest risk facing TPR and its objectives, Delfas did not point to DB but DC, pointing out that protections on savers were much lower over the next ten years.
The discussion on “investment pathways”, “default decumulators”, CDC and VFM suggested that TPR was prepared to push ahead of the legislative curve and encourage innovation and better practice in advance of the law catching up.
As with the DB conversation, consolidation was central to TPR’s strategy. Delfas mentioned that some schemes , with assets less than £100m , were already winding up at TPR’s instigation. There is no doubt that TPR are serious and it will be interesting to see how serious. The DWP’s position “option 3” of the proposals for the levy will tell us how serious the Government are going to get about “turning the long tail of small DC schemes in on itself” (Nausicaa Delfas’s descriptor).
Even more than with DB (where commercial pressures from sponsors drive change quicker), DC needs strong trustees capable of assessing VFM on a benchmarked basis rather than marking their own homework. The VFM assessment – which Delfas confirmed TPR and FCA were looking to implement despite it having no legislative backing, seems far from dead.
In Summary
Compared with recent bun-fights, this session was unsensational and considerably less raucous. It would have been inconceivable to have had this session this time last year and the extent to which TPR has moved on from its entrenched positions is remarkable.
But enough of the old TPR remains for the WPC to need to keep holding feet to the fire.
The task of transformation to a new mindset is far from over, indeed TPR is currently suffering a string of strikes as many of its 900 staff struggle to deal with a change in location, in working conditions and indeed of mindset.
But, judging by what I have just seen , the senior management team of TPR may well pull off an unlikely success and move TPR into a better place.
£400m and £600m should be billions, Henry.
Buy-out per se is not the problem. It’s de-risking and the effect that has in the aggregate to disinvest an economy. It’s a truism that not all schemes will go buy-out, so it’s not a great concession from TPR. They still have a mindset to force schemes to buy-out level of funding at no consideration of cost or the wider impact.
And good forbid they broaden the mandate to protect consumers. We’ve seen how they protected DB – kill it.
Sorry, but other than they’re better prepared and a bit smoother, we’ve yet to see any tangible change in mindset. Thst won’t happen until their mandate takes into account the scope for the damage they do on a whole economy basis.
I did not get to watch the session until late yesterday after a very long day. Perhaps that is why I was disappointed by what I heard. One point that came across again and again and again is that Lou Davey is the go-to person for almost everything – on this performance the interim title should be removed – and incentives to ensure she stays offered copiously. Can you believe that – me suggesting a regulator should be highly paid??
I have been asked to prepare a commentary on the session – that should be complete late next week or early the week after.
Save you the time Con.
It was a master class in mis-direction.
– our policy implementation didn’t lose the nation £600bn at all. No, no, it was only £400bn.
– we’re not going to drag every scheme over the Buy-out cliff, but we will be looking for stronger enforcement bayonets to help prod you along into making the same leap yourselves.
The sentiment from yesterday’s blog about Regulatory graveyard ring loud.
I’m not so sanguine either.
How anyone can regard the loss of £400bn (or 600) as an improvement in funding levels escapes me completely.
As I keep saying, actuaries and TPR continue to push DB schemes to hedge their valuation methods, not the actual liabilities.
Yes. We are told that the £20 billion or so that USS has lost due to LDI leverage is more than offset by the improvement in the way they define liabilities – as a DPV using gilts rates. This argument was advanced explicitly again yesterday at the annual Institutions Meeting. The valuation of liabilities is not the reality – which is that the pensions promises have not changed.
No one to hold the culpable to task. The actuaries mark their own homework.
It beggars belief that one elite exclusive group of professionals left could have wrought such havoc on an economy through the mantra of de-risking/disinvestment.
A classic example of the dangers of groupthink, when a profession dominated by those on the mathematical side of the spectrum were left to their own devices.
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