The New Regulator: Reflecting on One Year of Progress

1. The new regulator: one year on

2. Looking back…

3. A new kind of regulator • 2004 Pensions Act • response to new risks • need to improve confidence in pensions • a new regulator and a new compensation fund • Our objectives • protecting members’ benefits • promoting good administration • reducing risk of calls on the PPF • A new way of working • proactive • targeting risks • raising standards

4. What’s changing?

5. Gathering information • Scheme return • over 10,000 issued to date • starting with larger DB, moving on to smaller DB and DC • Whistleblowing • extended reporting duty: includes IFAs • when to report? • Notifiable events • employer-related, eg significant change in credit rating: employers must notify • scheme-related, eg payment of benefits on favourable terms: trustees must notify

6. The shrinking scheme return… Before: 53 pages, hard copy, blank After: 4 screens, online, prepopulated, interactive

7. Some other powers • Appointing independent trustees • over 60 appointed in past year, to schemes with combined membership of nearly 100,000 and assets over £1bn • exclusive powers if required • Improvement notices / third party notices • what needs to be done to put things right • who needs to do it, and by when • Recovering unpaid contributions • Freezing orders • In extreme cases, fines / prosecution

8. The regulator’s codes of practice • Straightforward guidelines on complying with legislation • Subjects covered include: • reporting breaches to the regulator • notifiable events • internal controls • Widespread informal & formal consultation, final approval by Parliament • Not mandatory to follow: ‘evidential’ • Useful for trustees, employers, advisers

9. Knowledge and understanding • The ‘trustee knowledge and understanding’ requirements • basic knowledge of trust and pensions law, principles of investment and funding • ‘conversance’ with scheme documents • level appropriate to role • in force since April 06: six months to get up to speed • The ‘trustee toolkit’ • free online training from the regulator • modules on trust / pensions law and investment available now: modules on funding available July 2006 • available to everyone, not just trustees • useful material for advisers, administrators, employers…

10. Looking Forward

11. Looking forward… Set out in our Medium Term Strategy (published April 2006) sets out the direction of travel Our priorities over the next three years: • Reducing risks to work-based DC scheme members • Improving governance • Strengthening DB scheme funding We need to focus on the highest risks

12. Large DB accounts for the biggest proportion of members… Number of members, by registered private sector scheme benefit type as at 31 March 2005 17.3m private sector scheme member records in total 86.5% of member records in large DB / hybrid Source: The Pensions Regulator (Pension schemes in the UK, 2005)

13. … but small DC accounts for the biggest proportion of schemes Number of ‘live’ private sector schemes by registered benefit type as at 31 March 2005 84,600 ‘live’ occupational private sector schemes in total 85% of schemes are small DC Source: The Pensions Regulator (Pension schemes in the UK, 2005)

14. We’re not just a DB regulator • Potential areas of DC risk include: • administration • governance • trustee competence: the majority of small DC schemes provide no trustee training • members’ understanding of scheme and awareness of benefits / retirement options • investment practice • move to contract-based? • fraud

15. Funding matters

16. Scheme specific funding: the practicalities Trustees need to: • consult scheme actuary: commission valuation and annual actuarial reports • establish target funding level appropriate to scheme (‘technical provisions’): MFR no longer sufficient • produce statement of funding principles • develop recovery plan, including schedule of contributions: generally aim to eliminate shortfall within ten years or less • negotiate with employer to reach agreement: what is affordable? • consider all options: modification of future accrual? • take independent advice if necessary • provide annual summary funding statement for members

17. Scheme specific funding: the regulator’s role • Our expectations • appropriate, prudent level of funding • concrete, realisable recovery plan • trustees / employer / actuary working together effectively • risks addressed: security and affordability • We want to know if… • employer and trustees fail to reach agreement • actuary refuses to certify calculations • employer fails to stick to schedule of contributions • Code of practice, guidance, example documents

18. How will we regulate DB funding? • Over 10,000 DB schemes: initial filtering using ‘triggers’ • Technical provisions: • below s179 / FRS17 range? • if within range: maturity of scheme, strength of employer? • Recovery plans: • longer than 10 years? • higher contributions towards end of recovery period? • inappropriate investment assumptions? • Triggers are a regulatory tool • NOT standards or targets • NOT our only means of judging funding plans • DON’T mean automatic intervention

19. Taking action against avoidance • Our expectations • schemes should be properly supported • communicate breaches, notifiable events, funding disputes • Contribution notices • deliberate attempt to avoid pension liabilities • can be issued to anyone involved in avoidance • any amount up to full buy-out debt • Financial support directions • eg scheme left with insufficiently resourced member of group • require employer (or connected / associated persons) to put support in place

20. Clearance • What is it? • planned transaction where employer has DB liabilities: eg merger, takeover, refinancing, restructuring • provides reassurance that we won’t take action • optional • When should it be considered? • change in priority of creditors, reducing security of scheme (eg granting fixed charge to lender) • return of capital, reducing assets available to fund pension deficit (eg exceptionally large dividend) • change in control structure, reducing employer’s ability to fund deficit

21. Clearance: what we’re looking for Some of the questions we ask when considering clearance applications: • have trustees been kept informed of plans? • are trustees negotiating effectively in members’ interests? • what level of risk does the transaction pose to the scheme? • mitigation offered – accelerated repayment of deficit, security over assets, parent company guarantees…? • have conflicts of interest been addressed and resolved? • have trustees taken (and acted on) independent advice? The result: improved protection for many schemes in difficult circumstances

22. In conclusion…

23. The Pensions Regulator • A new regulator, focusing on risks • preventing, identifying and tackling • Powers to: • collect information • take action • set standards, through codes of practice • Our first year • addressing DB funding issues: acting against avoidance • The year ahead • monitoring progress of funding: addressing risks to DC members: improving governance

24. Keeping in touch with the regulator • Customer support • customer support team (0870 6063636): first point of contact • specialist team for technical queries or in-depth investigation • Web • www.thepensionsregulator.gov.ukcodes, guidance, news, consultations, regulatory activity, publications • www.trusteetoolkit.comfree e-learning for trustees (and others!)

26. Thank you! …any questions?