Examination of Witnesses (Questions 20-39)
THE PENSIONS
REGULATOR & DEPARTMENT
FOR WORK
AND PENSIONS.
21 NOVEMBER 2007
Q20 Mr Dunne: Of the 360 how many
times have transactions taken place ignoring your advice?
Mr Hobman: If they had ignored
us we would refuse to give clearance and then the transaction
would not have proceeded, so I judge that where the clearance
has been given it is because we are content with the transaction.
Q21 Mr Dunne: I thought you told
us just now you did not have a power to direct. If a clearance
on a voluntary basis is sought—
Mr Hobman: I take your point absolutely,
so let me make it clear, what we are saying in the 360 cases where
we have given clearance is that we do not deem it appropriate
to use our powers at some point in the future in respect of that
particular transaction.
Mr Norgrove: I am aware of about
a dozen cases where we have told people that we were minded not
to give clearance and they have taken the application away. In
those circumstances, if we did not see it coming back to us in
a changed form, we would send it to another part of the Regulator
to investigate whether avoidance was in prospect.
Q22 Mr Dunne: Can you just explain
what other part of the Regulator you are referring to?
Mr Norgrove: We have an avoidance
team which would look at whether we would then wish to use our
powers because the company was looking to avoid its pensions liability.
Q23 Mr Dunne: Thank you. In relation
to the governance of trustees you have referred to the trustee
tool kit that you have introduced. Does the tool kit and the advice
that trustees are encouraged to take mean that we are looking
towards a uniform type of trustee and role they fulfil? I am thinking
in particular of trustees being driven by the tool kit to make
decisions more or less in tandem so that one pension will look
increasingly like another pension? It will have its own liability
profile but as far as its investment performance or criteria are
concerned that the precautionary principle is likely to apply?
Mr Hobman: I do not think we see
evidence of that yet. We have now processed something like 1,800
recovery plans and indeed have played back into the market the
summary of the data we have found from about the first 1,200.
One of our judgments, from what is admittedly just a snapshot
at this stage of the scheme funding process, is that schemes are
making scheme-specific decisions. In other words, they are coming
up with a considerable range of options which are relevant to
their schemes—scheme repayment periods which may be as small
as a day and as long as ten years or beyond, for example, differences
in discount rates being used, and differences in investment rates
being assumed. It is not evident that we have in any way a herd
mentality. That said, we think an important role of the tool kit
is to establish some common basic standards which we think were
missing in many respects in what is after all a very large, lay,
volunteer trustee community.
Q24 Mr Dunne: You have the power
to fine trustees who are not fit and proper. Have you exercised
that yet and if so how many times?
Mr Hobman: In the case referred
to in the Report we have disqualified a trustee, someone we felt
was not fit and proper. We also have a power where we believe
it appropriate to install for example independent trustees where
it is not such a clear-cut decision that the existing trustees
are not fit and proper but where we feel their resources may need
to be boosted by further expertise or indeed where there might
be an issue of conflict.
Q25 Mr Dunne: The only individual
case referred to in the Report is the only one where you have
actually had that finding?
Mr Hobman: Yes.
Mr Dunne: Thank you.
Chairman: Thank you very much. Nigel
Griffiths.
Q26 Nigel Griffiths: You have been
rather lucky I think in that the previous Report from the National
Audit Office into your predecessor the Occupational Pensions Regulatory
Authority (OPRA), was fairly damning and you appear to have addressed
those criticisms and indeed this is one of the less damning reports.
Let me ask you, what are your fears in terms of your present powers
being inadequate?
Mr Hobman: I think our view is
that the legislative framework that we have been given is fit
for purpose, and we continue to have a dialogue with the Department
to ensure that that continues to be the case, so, yes, I think
the legislative framework we have is fit for purpose.
Q27 Nigel Griffiths: Does it mean
that another Mirror pension disaster could not happen today?
Mr Hobman: I think no regulator
would honestly claim there would never be fraud in the system
again and I would not do you the disservice of claiming that now,
but I think it would be very, very much more difficult for something
of the size and magnitude and protraction of a Mirror case
to occur without it being detected and without powers being brought
to bear.
Q28 Nigel Griffiths: And how high
risk is your strategy of regulating according to risk as a strategy?
Mr Hobman: I think we have to
look at the wrongs which have occurred. That was a very significant
fraud; there is no doubt about that. There has been fraud since
then; there is no doubt about that either. However, as a proportion
of the total assets of maybe a trillion pounds in this industry,
then it has been only a very tiny proportion of the risks which
have manifested, so if we were to set ourselves up solely to be
on the guard for fraud risk—and we do of course have regard
for fraud risk—then I think we would be missing many, many
other significant risks to members.
Mr Norgrove: I think a non-risk
based system is higher risk than a risk-based system and that
the attempt to regulate 80,000-odd pension schemes equally would
be doomed to failure.
Q29 Nigel Griffiths: One of the criticisms
being made is that your body is not sufficiently clear about the
level of performance that you think is necessary to ensure that
schemes are governed adequately or whether all types of scheme
should be aiming for the same standards of governance. What sort
of brain storming have you been doing internally to try and clarify
those targets to see whether there are targets that can be set?
Mr Hobman: I am not sure that
we have lack of clarity about the targets. We do have very clear
targets now for where we believe are the important areas of governance
across both DC and DB and just for DC. We have for example a performance
dashboard, as we call it, which has 65 different measures on it
many of which are specifically addressing DC and the governance
measures that we continually monitor through our market research.
In coming to an agreement on what those risks are as opposed to
measuring them, which we do, we have extensive consultation with
the industry. We have an advisory panel with very broad representation
which meets very regularly. We have a DC working group which also
meets very regularly, of industry representatives who make sure
that we are focused on the right sorts of things. Our risk model
allows us to identify new risks so even though we might feel that
we have now got pretty much those which are prevalent taped, we
do not ever presume that new ones will not come along, and the
sort of feedback we get, for example, from the contacts we get
from our front office and from our wider scanning of the markets
and from industry I believe will keep us on our toes in this respect.
Q30 Nigel Griffiths: There are two
other cross country examples that have been explored by the NAO
for comparison purposes. What other countries have got systems
that you in any way envy or powers that you would like us to consider
as legislators adopting?
Mr Hobman: This is not meant to
be in any way smug but I do not think that we envy other regulators
their approach. We know that there are different levels of scheme
funding in other countries. So for the Dutch regulator it is more
of an issue of taking a relatively small number of very large
schemes and ensuring that a very high level of solvency is maintained.
The Americans and the Irish have quite similar systems to ourselves
but I know you have just visited the States, David, and felt that
in some ways they are envious of us; is that fair to say?
Mr Norgrove: I think that is true.
Their equivalent is the Pension Benefit Guarantee Corporation.
They only have one power which is compulsorily to wind up a pension
scheme. It is a nuclear power which they use extremely rarely
but they have to threaten it all the time.
Q31 Nigel Griffiths: What is the
most recent innovation or improvement that you are taking some
pride in?
Mr Hobman: If I am allowed two
then one would be a process. The importance for us of gathering
data is clear and we do that through the scheme returns, and that
is a burden that we place certainly on large schemes every year
and smaller ones every few years. We have taken what was originally
a paper-based, very unwieldy and rather difficult (from their
perspective) form to fill in and we have turned it into a much
lighter, much more efficient, pre-validated, pre-populated on-line
system, and we will be launching that in a couple of weeks, so
we are very proud in that sense of being able to reduce the effects
of the cost of regulation. In terms of the way we regulate, I
think we are proud of having got to a stage where we have seen
some real green shoots in terms of the new funding regime through
the survey that I have just referred to where we can see that
things have started to move on and therefore I have a belief that
the way we work and the way we act can have a real influence on
protecting members' benefits.
Nigel Griffiths: Do not put the data
on disk!
Chairman: Phil Wilson?
Q32 Phil Wilson: Just two or three
points really on the risk management side. I think it is on Page
19 of the Report, Paragraph 3.12 where you collect all the data
together for the schemes that you have got in place now and you
have had to get it from several sources. Do you think the system
you have got now is pretty robust?
Mr Hobman: Yes we do. One of the
earliest deliverables that we knew we needed to have in place
was a decent core database to hold our data, and that is certainly
something that we did not inherit from the previous body. We now
have that. It is a system called Score. It is a very robust, straightforward
relational database and it is at the heart of all our information
systems. For example, the data from the scheme returns that we
collect goes straight into Score and then it interfaces in different
ways with our other systems. I have to say it is still early days
in terms of building some of those interfaces, we are still improving
those as we go, but it is at the heart of our systems and it is
much more effective than what we had before.
Q33 Phil Wilson: The other point
is I know you have 80,000-odd schemes that you have got to cover
and part of what you do is basically down to education.
Mr Hobman: Yes.
Q34 Phil Wilson: I know a colleague
has already mentioned the trustee tool kit and you have 20,000
people who have registered for that. I know it is on a voluntary
basis and they do not have to complete the course but do you know
how many of those 20,000 do actually complete the course?
Mr Hobman: I think that is research
that we are currently undertaking. I believe at the moment the
figure is a relatively low proportion of that number; I can tell
you that much. That said, the course is built to be modular. There
are up to 11 modules that you might do as a trustee and you are
not required, nor indeed expected, to do all of them. What they
are designed to do is to cover all the bases, all the areas you
might be interested in as a trustee. For example, you could do
one on scheme funding if you were a member of a DB scheme, there
would be one on scheme governance that might not be relevant to
you, and one on strategic investment that you probably would not
want to look at unless you were in a much larger scheme with more
complex investments. We do not look for tool kit completions as
being evidence that it is necessarily being used, but we acknowledge
that we need better information on how it is being used, not least
so that we can market it more widely than we have done so far.
Q35 Phil Wilson: 3,300 trustees are
involved in the money purchase schemes and 16,700 for final salary.
Which of those two groups has seen the most rapid growth rate?
Mr Hobman: The growth rate in
terms of numbers of new schemes, as we have seen, is money purchase
schemes, and we know from our research that governance standards
are generally lower in the smaller schemes, which is the great
long tail of schemes in our pensions landscape, so the heart of
the challenge, if you like, for us is to ensure that the tool
kit is widely used in those smaller schemes, and that is something
that we shall be addressing through the way we market it not just
this year but also next year, not least because we will have better
data on the schemes in order to contact them and market to them
through the returns that we are collecting.
Q36 Phil Wilson: That is through
the new database?
Mr Hobman: The new database.
Q37 Phil Wilson: What percentage
is that of the total number of trustees? How many trustees are
there?
Mr Hobman: It is a relatively
small number. The tail of schemes, tens of thousands of these
smaller schemes that only have two to four members so they will
only have a very, very low number of trustees, although it is
a long tail so it is still a sizeable population. We know that
we are having to address an issue with tens of thousands of people.
Q38 Phil Wilson: How many trustees
are there in total, do you know?
Mr Hobman: 130,000 trustees in
total. That is our best estimate.
Q39 Phil Wilson: It is about 15%
or so?
Mr Hobman: Of that order.
| 
