Examination of Witnesses (Questions 1-19)
THE PENSIONS
REGULATOR & DEPARTMENT
FOR WORK
AND PENSIONS.
21 NOVEMBER 2007
Q1 Chairman: Good afternoon and welcome
to the Committee of Public Accounts where today we are looking
at the Comptroller and Auditor General's Report on The Pensions
Regulator: Progress in establishing its new regulatory approach.
We welcome Tony Hobman, who is The Pensions Regulator's Accounting
Officer. Would you introduce your two colleagues?
Mr Hobman: Mr David Norgrove,
who is Chairman of the Regulator, and Mr Bill Galvin, who is Deputy
Director of the DWP's Pensions Protection and Stewardship Division.
Q2 Chairman: Thank you very much.
Would you like to please look at Figure 9 on Page 18 of the Comptroller
and Auditor General's Report. If you look at that figure you will
see that you are giving minimal attention to some 81,000 schemes.
How can you assure us that the pensions in these schemes are safe?
Mr Hobman: Based on the premise
that we are seeking to be risk based—and that is something
that we were set up to do very much at the behest of this Committee
amongst others—we feel that with the resources we have we
are focusing on the real risks and the big risks to pension members'
benefits, and by doing that we have to deploy our resources in
a way which recognises that a large number of small schemes are
most effectively dealt with through our education and enabling
facilities. That said, they are entitled to as much protection
as other schemes in terms of the whistle-blowing regime, the degree
to which they are able to contact us and receive advice, and the
degree to which they benefit from the intelligence work that we
do. In the box at the top left of the diagram you see that it
is emphasising the degree to which we do, as we say in the Regulator,
look for needles in haystacks, but even in the smaller schemes
we do see where we can make connections where there may be issues
that we can deal with.
Q3 Chairman: If you look then at
Appendix Five on Page 42, you say that this tracker research does
not cover pension scheme members. Why are you interested in everybody
else's opinion apart from those whose interests are most at stake?
Mr Hobman: Forgive me, I am sorry,
I did not get the reference, Chairman.
Q4 Chairman: If you look at Page
42, Appendix Five you will see the Annual Perceptions Tracker
Survey to the top left-hand side of the page and you say: "These
cover pensions professionals and lay trustees but do not cover
pension scheme members ... " Why are you interested in everybody's
views apart from the members' themselves whose livelihoods are
most at stake?
Mr Hobman: We are interested in
their views and indeed as part of our work on DC schemes and governance
we have identified member understanding as one of the key risks
that needs to be addressed, but we also recognise that the FSA
in particular has a very significant role in addressing financial
capability and member awareness. Indeed, one of the findings of
the Report that we take on board is that we have to continue to
work closely with them to ensure that they understand pensions
issues and feed those into their work. That said, we do deliver
many of the key messages that members need to know through trustees.
That is an efficient and effective way to cascade information,
dealing with a population in that case of maybe 130,000 rather
than trying with our relatively limited budget and small staff
numbers in the Regulator deal with millions and millions of members.
I do not think we would make much difference if we sought to do
so on that basis.
Q5 Chairman: If you look now at the
trends in the pensions environment, which is an important point
dealt with on Page 8, Paragraph 1.6, as we know, final salary
schemes are declining and when members' benefits are at risk in
a final salary scheme they have to be told, do they not, but this
does not happen with money purchase schemes. Does that worry you?
Mr Hobman: Yes, as I have said,
I think the need for there to be member awareness at a number
of stages of a pension scheme's life—for example when members
come to make choices about annuities—is important to us
and they are ones that we have highlighted and the ones that we
are working on with trustees to ensure that members have a good
understanding of them. We also have to recognise that the funding
risk of a scheme transfers from the DB environment, from the employer,
to the individual, and we do not pass a judgment on that as a
Regulator as to whether that is a good or a bad thing; that is
the world in which we live.
Q6 Chairman: That does not answer
the question. How will people who invest in money purchase schemes
know if their benefits are at risk?
Mr Hobman: They get an annual
statement which tells them how much they have in their fund and
its value and they also have, in many cases trust-based schemes,
trustees looking after their interests, as is intended, and there
will be member communications to them as a result of that. We
found through our research that not all schemes, and particularly
the smaller schemes, have quite the level of understanding and
knowledge to give out that information.
Q7 Chairman: That is what I mean,
this is a requirement of final salary schemes not of money purchase
schemes.
Mr Hobman: Indeed, and that is
why we have focused so much of our attention going forward on
important issues surrounding communications with those schemes,
and getting trustees up to the mark through the Knowledge and
Understanding Code and the work we have done with our trustee
tool kit so that they understand the importance of communicating
with members. That is very much a task that lies ahead of us and
we accept that responsibility.
Q8 Chairman: Let us look then at
Figure 2 which tells us what I think we are all aware of that
the number of occupational pension schemes is declining remorselessly.
We also know that there is a declining commitment on the part
of employers to offer final salary schemes. I wonder whether you
think there is a risk that regulation may push them into closing
viable schemes?
Mr Hobman: I think we accept absolutely
that there is a cost to regulation and the effect of the legislation
that came in in 2004 was very much geared to exposing the real
costs of providing DB schemes. This is a long-term trend and it
certainly predated the Regulator, but our task was to take that
policy intent and make sense of it. I think one of the things
that we did at a very early stage, which in a way helped soften
that blow but kept that awareness high, was to emphasise the importance
of reasonable affordability, in other words to say to trustees
you need to negotiate robustly but you also need to remember that
the best guarantee of members' benefits going forward is the continuing
solvency of the employer behind the scheme. In many ways we have
run the regime in a more flexible and light touch way than we
might otherwise have done because we recognise the importance
of that.
Q9 Chairman: That leads me straight
on to my next question which is your enforcement powers which
are dealt with at Paragraph 4.2 on Page 21. You have really made
very little use of your enforcement powers. I think you have only
served two dermination notices; is that right?
Mr Hobman: Yes, that is right.
[1]
Q10 Chairman: It sounds a very low number
to me.
Mr Hobman: Yes, it is a low number.
These were some of the most high profile and in many ways when
debated in Parliament the most contentious powers that we were
given, and they were seen as powers that would not be used lightly;
and we do not. We have used our powers extensively in a number
of other areas and we would always use them where we felt it was
appropriate to do so. Thus far the threat of those powers, not
least because they are significant, we believe in our judgment
has worked and has led to changes in behaviour. We have, as you
will see from the Report, issued some 360 clearance notices, in
effect making a judgment every time on a particular transaction
as to whether we would use those powers in due course.
Q11 Chairman: Finally, how would
you know if there are any Northern Rocks in the schemes that you
regulate?
Mr Hobman: That is a very good
question. I would say from The Pensions Regulator's perspective
our view of the world is a little different in that we are looking
at corporate entities through schemes. There is a market-wide
risk which could of course occur which would be a sustained economic
downturn which would affect all schemes' viability, although there
there are some levers which can be pulled in the scheme funding
to the degree for example that recovery plans can be lengthened
to help mitigate that issue. There is also clearly a risk for
any scheme, particularly one with a large deficit, that there
could be a sudden and catastrophic failure of the employer. That
is something that we as a Regulator cannot prevent. We were not
created to prevent corporate insolvencies. What we can do is make
sure that trustees are up to the mark and know what to do should
that occur and that they, like us, monitor covenants to ensure
that the funding plans they have in place are appropriate. There
is of course also now a protection fund in place which there was
not prior to the legislation for where that does occur and the
scheme is underfunded.
Chairman: Thank you very much. Philip
Dunne.
Q12 Mr Dunne: We can see from Page
11, Figure 4 that to fulfil one of your strategic objectives you
should seek to strengthen the funding of defined benefit schemes.
Since you have been established two and a half years ago how many
defined benefit pension schemes have closed to new members?
Mr Hobman: I know that one-third
of schemes are now fully opened but I am not sure what the figure
for the—
Mr Galvin: Of the schemes that
are eligible for the Pension Protection Fund only about 38% are
open to new members. However, 63% of the membership of defined
benefit schemes are in open schemes which seems to indicate that
the larger schemes are the ones that tend to remain open longer.
Chairman: We had better go and vote.
The Committee suspended from 4.00 pm to 4.09
pm for a division in the House.
Chairman: Mr Dunne?
Q13 Mr Dunne: Mr Hobman, were you
were interrupted from responding?
Mr Hobman: Indeed, and I have
the answer to your question. There were 350 defined benefit schemes
that fully closed in the last two years, although I also noted
in looking at the figures that in 2002 the figure was larger at
450, so there has at least at this point been a decline in the
number.
Q14 Mr Dunne: Have you made any assessment
of the extent to which a proportion of those closures are in any
way the responsibility of your activities in seeking to provide
improved protection for pensioners?
Mr Hobman: I cannot give you a
scientific correlation—that is not a piece of research we
have done—but I think it is a reasonable assumption to make
that the new legislation has, as intended, thrown up and highlighted
the true costs of providing these benefits to members and it has
asked us to hold the ring in terms of the process that then seeks
to redress that. It is, I guess, an inevitable consequence of
our activity in seeking to get schemes adequately and properly
funded that many finance directors and employers will make judgments
about the true costs and the volatility of costs and decide accordingly.
Q15 Mr Dunne: We can see very starkly
illustrated in the chart which the Chairman referred to on Page
9 that this is a trend which has been continuing for some time
and looks set to continue for the foreseeable future. Do you anticipate
that the era of defined benefit schemes is to all intents and
purposes over?
Mr Hobman: I do not anticipate
it from a regulatory perspective because although I cannot predict
where the trend will go next (although much of the data we collect
with our colleagues in the PPF (Pension Protection Fund) through
the so-called Purple publication will tell us year on year where
that trend is going) from a regulatory perspective we still have
a very large legacy issue because although these schemes may close
to new and existing members, they still have millions of members
in them, so from my perspective we are still holding the ring
around very, very sizable liabilities which have to be managed
by the trustees.
Mr Norgrove: If I could add one
point there. I think one thing that we are seeing is defined benefit
pension schemes being left with very large companies—clearly
companies that are better able to carry that long tail liability
than smaller companies—so I guess the answer to the question
really depends on how much employees themselves value those benefits
and therefore whether the companies continue to see them as a
benefit to be offered. I think there is some evidence of that
and with employees now understanding the value of the pension
scheme better maybe they will continue to press for it.
Q16 Mr Dunne: Is it you or the Pension
Protection Fund that determines the level of contributions for
the pooled insurance rate effectively that schemes have to contribute
to the PPF?
Mr Hobman: The risk-based levy
is set by the PPF.
Mr Galvin: The Board of the Pension
Protection Fund sets the risk-based levy.
Q17 Mr Dunne: Do you as Regulator
have any influence or discussions over that rate setting?
Mr Hobman: Our role primarily
is to provide the data for them from the schemes and from the
schemes returns to allow them to calculate that. It is really
a decision for the Board as to how they set that although we are
party to those discussions.
Mr Norgrove: I sit as an observer
on the PPF Board but clearly it is a matter for them.
Q18 Mr Dunne: One of your main roles
has been in the event of corporate activity to make sure that
if there are unfunded pension schemes in relation to a company
on which an offer has been made and may be taken over that it
is fully funded. How do you determine at what level it is appropriate
to consent to a transfer taking place and how do you balance the
competing requirements between shareholders and pensioners?
Mr Hobman: The straight answer
is that there is no one answer to that because all these matters
are dealt with on a scheme-specific basis and there are many variables
that may be in play in any one transaction—for example,
the covenant of the company before the transaction and then another
company maybe coming in and taking over and then having a different
level of covenant, the amount of security that might be offered
as mitigation, and so on and so forth, but the fact is that we
do require that the trustees and their advisers think about those
issues and come up with an answer which is, on balance, appropriate
for that scheme going forward.
Mr Norgrove: But we have no power,
just to be clear, to stop a transaction. Clearance is a voluntary
process and it is not for us to say yes or no to it. All we do
is give an undertaking that if clearance is sought we will or
will not use our powers in relation to the transaction.
Q19 Mr Dunne: How often has clearance
been sought?
Mr Hobman: Clearance has about
sought in just over 360 cases. It has been refused only three
times, although we have had many more informal discussions with
parties to potential transactions, something like six times as
many, which may then proceed without clearance because it is not
required or which may be modified and then come for full clearance.
1 Note by witness: The Pensions Regulator had
only published two determination notices at the time the NAO Report
was published (in the cases of Ericsson and Sea Containers). Mr
Hobman's response referred to this fact. A further notice was
published in relation to the Telent case on 9th November 2007.
However, many more determination notices have been served (but
not published) by the Regulator since its inception in April 2005. Back
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