My day with the Pensions Regulator
The Pensions Regulator (TPR) is making friends. At its annual stakeholder conference on 30 May 2012, the regulatory body for the pensions industry promised to be much more pro-active from now on in helping pension funds with problems before they arise, rather than only when crisis hits. For example, the Regulator intends to walk through the valuation process with around 40 or 50 pension funds, so it can learn about how the process is tackled by funds at the sharp end.
One area where relations between TPR and the industry have yet to thaw, however, is on the impact of quantitative easing (QE). TPR’s April 2012 statement on QE essentially ruled out any suggestion that pension funds might be able to ‘smooth’ asset and liability fluctuations to mitigate the short-term jolt of QE on pension fund valuations.
QE impacts pension funds by reducing gilt yields – arguably this is what QE in its current form is designed to do. Invariably pension funds are heavily exposed to gilts so their deficits will increase. There is an additional impact on pensions more generally, in that insurance companies, who provide annuities for defined contribution (DC) pension savers, are also exposed to gilts, and therefore annuity prices are driven down by QE.
Yesterday TPR reiterated that fund recovery plans, not valuations, are the best place to take the impact of QE into account. The NAPF and the CBI both advocated ‘smoothing’ of some form. Darren Philp, Director of Policy at NAPF, said pension funds have become an unnecessary victim of an environment in which gilt yields are being deliberately influenced by the government’s macro-economic strategy. Jim Bligh, Head of Pensions Policy at the CBI, argued that TPR’s guidance was too prescriptive and that other European countries allow some form of smoothing.
The other side of the argument is that might be dangerous to allow pension funds and sponsoring employers to manipulate the valuation process. The process is heavily regulated precisely to ensure that the protection of members’ entitlements remains paramount.
Furthermore, the Bank of England’s deputy governor Charlie Bean, and Monetary Policy Committee member David Miles, have both argued that QE has not impacted pension funds as much as the industry claims. QE boosts share prices, therefore offsetting the more obvious impact on bonds.
On the DC side, it was areas beyond TPR’s remit that proved most pressing. They are clearly expecting a huge rise in contract-based DC provision, but for the most part such schemes will remain within the Financial Services Authority’s regulatory territory.
And several stakeholders present complained that what most affected outcomes in DC provision was not governance, administration, communications, etc. – the kind of issues covered by TPR’s six principles for successful auto-enrolment – but rather levels of contributions. Again, this remains outside the regulator’s authority. Clearly, it is for government, rather than the regulator itself, to adjudicate on the scope of TPR’s authority. There was a distinct sense, however, that these arrangements might not endure for much longer.