Following yesterday’s announcement by The Pensions Regulator which the ABI warned was light touch, lacking in detail and may place pensions savers at risk, our Head of Long-term savings policy, Rob Yuille has blogged on the background to the policy and the dichotomy of views between regulators, policy makers and providers.
Polarised views are often a sign of an unhealthy debate. Society has more entrenched views to worry about than those in pensions, but some fundamental differences of opinion about the security of people’s retirement savings need to be reconciled.
In our response to The Pensions Regulator’s new regime for Defined Benefit ‘superfunds’ this week, we didn’t take any pleasure in saying it is light touch, short on detail, and risks selling savers down the river. Nor were we particularly surprised to see occupational sector representatives saying the complete opposite – that this is a very high bar, thorough, offering strong consumer protection, and even that it errs on the cautious side.
Such stark disagreement may be common within industries, but is less so between public bodies. Yet the PRA’s remarkable response to DWP’s consultation in 2018, and subsequent speeches, departed from the Government’s view and recommended a similar approach to Solvency II for insurers, because they had risks in common with superfunds and the promises made to pensioners are the same.
TPR appeared to have listened and proposed capital requirements based on Solvency II in its private consultation in October: superfunds would need to hold sufficient capital to withstand a 1-in-100 year event in each and every one-year period, compared to 1-in-200 for insurers. We supported this, and proposed that it be based on a standard model, as it is for insurers, banks and every other regulated company making financial promises to customers. This would have meant trustees could make a direct comparison between their own scheme, an insurer and a superfund.
But TPR rowed back, giving superfunds more latitude to come up with the “opaque models, optimistic assumptions and impenetrable mumbo jumbo” that the PRA had warned against. Of course, superfunds will need to justify their assumptions to TPR. But still, this perfectly illustrates the culture clash between insurance and pensions, taking fundamentally different approaches to the same job of protecting pensioners.
Separately, this week the PRA issued results of a stress test in which life insurers had to measure the impact of half their assets’ credit rating being downgraded, and found it would be manageable for firms. Conversely, TPR’s guidance said superfunds can go ahead and set their own homework, coming up with their own stress tests.
The dichotomy has been spotted by at least some of the public. The comments sections of news websites are not usually a source of wisdom, but this commenter in the FT online explains the situation well:
“This is a weird form of public policy. A bit like allowing a new sort of car or aeroplane which doesn't have to follow all the existing safety rules and so is cheaper than the 'fully regulated' version.”
These regulatory contrasts are not limited to superfunds. There are differences between the FCA and DWP on disclosure requirements for DC pensions; DWP is considering how to implement investment pathways, under pressure to do something different to the FCA; and part of our scepticism about Collective DC is that while it looks a bit like a with-profits arrangement, it won’t be regulated as such.
So how do we depolarise and bridge the gulf between regimes?
We know DWP and HM Treasury work together closely, and the fairly long-standing Economic Secretary and Pensions Minister like to emphasise this. But it’s reasonable to ask: what does the government as a whole think is an acceptable level of risk to a pensions promise? Based on the answer, they might consider changes to the insurance regime as well as the pensions regime.
The regulators are already working jointly more than they have in the past, but this could go further still. A merger would not be straightforward because of the variety of functions and skillsets. But a single regulator for workplace DC, a common regulator for pensions and insurance, and central bank oversight of financial institutions like superfunds, would make sense and are not uncommon across the world.
And maybe it needs a change of attitude within the industry too. The diverse pensions sector has much in common – not least a stated desire to protect scheme members’ benefits; and now that the genie is out of the bottle, there is a need for a robust regulatory regime for superfunds on the statute books. As the Government finds a way to make that happen, the industry can find what it agrees on, even if we agree to differ about the detail.