Examination of Witnesses (Questions 40-59)
THE PENSIONS
REGULATOR & DEPARTMENT
FOR WORK
AND PENSIONS.
21 NOVEMBER 2007
Q40 Phil Wilson: What you are saying
is the main problem is actually getting to these smaller schemes
where there may be three or four members and you are going to
remarket the tool kit to try and get to those?
Mr Hobman: Yes indeed we are and
because the scheme returns that we have focused on thus far have
largely been from the bigger schemes and from the DB schemes (because
we have had to collect that data for the PPF levy at the very
least) all the data collection we will do between now and the
launch of the new system I just referred to in March next year
will be into this tail of smaller schemes. As soon as we have
that good data then we can start marketing to them in a much more
structured way than we have been able to do thus far.
Phil Wilson: Thank you.
Chairman: Thank you very much. Austin
Mitchell.
Q41 Mr Mitchell: I cannot see how
you can do the job. You are skating over the surface of a large
number of pension schemes and relying on information to find out
what is going wrong. Puff pastry is a by-product of this industry
as it is of company reports. We are always doing the best even
if we are dithering on the edge of bankruptcy. They are not going
to say they are failing in their duties and project a miserable,
depressing picture and report in. You cannot regulate on that
basis.
Mr Hobman: We do do a considerable
amount of market research and although it is certainly true to
say, and you have seen from the Report, that some of the measures
at least are derived from trustees' own confidence—the heart
of your point—there are many other hard-edged measures that
we take that tell us whether their confidence is well placed or
not. For example, if we were looking at an area such as managing
conflicts of interest, then some of the questions that we will
be probing on are not just do you think you have a decent policy
for managing conflicts but have you actually got a policy in place.
Q42 Mr Mitchell: You have a system
for trustees to report in any deficiencies in their schemes?
Mr Hobman: Yes.
Q43 Mr Mitchell: Do they use that?
What sort of scale is whistle-blowing used on?
Mr Hobman: The research that we
do is based on a sample which is big enough to tell us with confidence
whether trustees standards across the board are actually improving.
Whistle blowing covers all trustees.
Q44 Mr Mitchell: Where the trustees
of Mega Mitchell Productions, which will manage my future career
and public appearances and public speaking engagements (bookings
available!) feel that something is wrong and this scheme is not
operating properly and Mitchell might be taking money out of it,
what can a trustee do to blow the whistle on that?
Mr Hobman: They can pick up the
phone to us is the first thing they can do, as can their advisers
and many others.
Q45 Mr Mitchell: Do people do that?
At what sort of scale does that happen?
Mr Hobman: Yes they do. We get
on average about 50 whistle-blowing reports every month from schemes
across the piece so we know that the system is active and works.
Q46 Mr Mitchell: What do you do when
you get one?
Mr Hobman: We investigate it.
We talk with the trustees or whoever it is that has blown the
whistle and then try as quickly as we can to unpack the issue
and see whether it is a breach that we can deal with and whether
it is a significant breach and what response we might have to
make. In the diagram in the Report which shows the triage function
which we have behind the front office, as it were, whistle-blowing
reports are filtered in a way that either allows them to be dealt
with swiftly by the front office (and they are very experienced
in receiving these things) or quickly to be escalated into the
heart of the Regulator where we might open a formal case and deploy
whatever resources we feel are appropriate.
Mr Galvin: There is a level of
protection built into the system and the trustees are required
to take professional advice from a number of professionals—auditors,
actuaries, et cetera—and these also have whistle-blowing
responsibilities.
Q47 Mr Mitchell: Okay, but in the
main you work by their reports, on the basis of them reporting
in. You do not have a regular system of inspection that every
scheme will be inspected every two years or wherever?
Mr Hobman: No that is true, we
do not.
Q48 Mr Mitchell: Do you think that
is necessary?
Mr Hobman: We do not judge it
is, no. The way we have been set up was to have a whistle-blowing
process in the front-line, as it were, together with trustees'
competence which, as we have said, is something that we need to
improve. Whistle-blowing has been extended to more people than
was the case under the previous regime. We also now have something
called "notifiable events", in other words significant
events in the life of the scheme or the employer where we would
also require a report to be made to us. So the front-line, if
you like, is deeper than it was. We also put a great deal of effort
and activity into the research that I have talked about and into
scanning and intelligence, not just sitting in our office and
waiting to hear things but actually finding out what is going
on out there with schemes, not least through our discussions with
our stakeholders, who of course include many of the professions
and the representative bodies who are only too willing to tell
us where there are systemic issues arising.
Q49 Mr Mitchell: I am all for more
work for auditors! It says in the Report that your research indicates
that improving the governance of schemes must be one of your main
priorities.
Mr Hobman: Yes.
Q50 Mr Mitchell: How do you do that?
Do you have a model constitution, a model governance structure?
Do you circulate best practice? Do you pick out some schemes and
say Company X's scheme is marvellous whereas Company Y's scheme
is a disaster?
Mr Hobman: I am not sure we put
it in quite those stark terms but yes is the straight answer.
We are starting to move on the governance of DC schemes from the
phase where we have been finding out what is wrong, establishing
what is wrong, playing back to the market what is wrong and now
doing something about it in terms of the products that we produce,
so a lot of the guidance that we are now producing and will produce
through next year for trustees, particularly on the seven governance
areas that we have highlighted as being particularly key, will
be full of best practice examples and maybe, as you say, examples
of where things have not gone so well. We see that very much as
a tool that we would use going forward.
Q51 Mr Mitchell: You could do an
annual award: "The Pensions Regulator's Scheme of the year
is da-da-da-da ... "
Mr Norgrove: I can tell you the
pensions industry is not short of awards and dinners!
Q52 Mr Mitchell: I know that. It
is not short of rewards either. Let me ask about representation.
I am glad you are concentrating so much on education because in
my experience pension trustees have been too diffident and too
ill-informed and anxious to do the job but not knowing how to
do it. In my experience, unions have always provided an effective
training and back-up system. Is that your experience too? Do you
encourage the unions to be involved?
Mr Hobman: We do encourage the
unions and in fact we have worked with the TUC in providing training
and information to them so that they are fully appraised of what
it is we are doing and what we think the issues are. Indeed, we
have a number of unions coming to visit us I am not sure if it
is this week or next to talk about some of the current issues
that we face. We believe we maintain a good dialogue with all
the important representative constituencies.
Q53 Mr Mitchell: Would it be sensible
to prescribe some system of election of trustees so they are accountable
to a constituency?
Mr Hobman: Trustees have to be
nominated and elected to their boards but that is a matter for
the schemes themselves.
Q54 Mr Mitchell: Either by their
employees or at the annual general meeting or whatever?
Mr Hobman: Yes, the legislation
requires that there are a certain number of members of the scheme
as a proportion of the board, so there are at least a third of
members on the board and there is to that extent a quota. Who
then seeks election and joins is of course a matter for the schemes
themselves, but there is meant to be broad representation, at
least across member interests and for example other interests,
including employers. That is why we do focus quite a lot on issues
of conflict of interest to ensure that those do not arise and
trustees know how to deal with them.
Q55 Mr Mitchell: When they are elected
you help educate them because a lot of the problems arise from
the fact that many of these people are company creeps rather than
sterling defenders of the independence of the schemes.
Mr Hobman: We are conscious of
the issue of conflicts of interests and indeed that is in one
of our seven governance risks.
Q56 Mr Mitchell: Let me go back.
One of the problems of the 1980s, which was the prelude to the
problems we have been having recently, was the practice where
firms took contribution holidays. It was largely the consequence
of pressure from the company on the pension scheme and now of
course they are claiming they cannot afford to give them full
and proper pension coverage so they are having to end the schemes.
Some of the pensions holidays were effectively weakening the schemes.
Do you have the power to stop contributions holidays?
Mr Hobman: I do not believe we
have the power to stop holidays, it is a matter of legislation
as to pensions holidays.
Mr Galvin: The scheme funding
legislation prescribes that where a scheme is in deficit it must
submit a recovery plan to the Regulator and that would outline
a series of contributions to that scheme in order to make up the
deficit. If the scheme is not in deficit, well then, it is a matter
for the trustees.
Q57 Mr Mitchell: If now somebody
comes along and says we want a contribution holiday do you have
to approve it? You cannot stop it? You can enforce contributions
and make them bring it up but you cannot stop them draining it
out?
Mr Norgrove: As Bill was explaining,
under the 2004 Act the company and the trustees have to agree
what are called the "technical provisions", which is
in effect the amount of money that needs to go into the scheme.
If there is a deficit against those then the company has to fill
it. Once you have got to the technical provisions, if they are
reached and then do not increase, for example at the next valuation,
the company does not have to put more money in to make up a deficit.
It does have to contribute of course the amount of money to pay
for the liabilities that are still accruing.
Q58 Mr Mitchell: Okay. Nigel mentioned
Captain Bob-Bob-Bob, as he was called at one stage, and the Mirror
pension scheme, and that was a situation where it seemed to be
known to people in the City but not to the people nominally responsible
for the pension scheme. Do you have a wider network of contacts
and warning systems about the health of the company which will
help to keep in touch with the prospects for the pension scheme
or is it just whistle-blowing by pension fund trustees?
Mr Hobman: As I was saying earlier,
there are now categories of notifiable events which are in place
under the legislation where either the trustees or the employers
themselves have to report.
Q59 Mr Mitchell: So it depends on
the vigilance of the trustees?
Mr Hobman: And of others too.
| 
