In Depth: Regulator’s new DC approach is a sign of things to come

The UK pensions industry is facing profound changes, and at a pace not usually associated with a long-term, slow-moving sector. 

Chancellor Rachel Reeves last year set out her  – large scale defined contribution (DC) funds with the scale and expertise to invest in a diverse range of assets and to provide millions of people with the means of achieving a comfortable retirement. 

The twin forces of automatic enrolment and the closure of defined benefit (DB) pension schemes have already led to the than into their DB schemes.

“2025 will be a year of decisive action from the Pensions Regulator, with genuine and open collaboration and a focus on long-term outcomes for savers over tick-box regulation.”

Nausicaa Delfas, TPR

Master trusts, vehicles set up to facilitate auto-enrolment, are growing ever more influential. Their size and growth trajectory mean they will quickly become major asset allocators with international influence – and . 

These rapidly growing organisations are responsible for the retirement outcomes of millions of people across the UK. This level of influence and responsibility requires a change of mindset from those overseeing these pension providers – hence . 

The regulator will split the DC providers it oversees into four groups: “monoline” master trusts, commercial master trusts, non-commercial master trusts and collective DC schemes, and single- and connected-employer DC plans. 

‘Expert to expert’

At the start of last week, TPR’s chief executive Nausicaa Delfas preceded the DC announcement by setting out . 

Delfas pledged to engage with industry and courted “ideas and suggestions”, adding that “we also don’t want there to be any surprises”. 

“Through our expert-to-expert, risk-focused supervision approach, we will ensure we are asking the right questions at the right time to identify risks and challenges and support effective decision-making.”

The Pensions Regulator

With master trusts, the regulator has already tested what it calls an “expert to expert” approach. This will see the biggest master trusts working with a dedicated team of experts at TPR to ensure the regulator keeps track of strategy, investment policies and other key issues. 

The regulator believes this approach will help encourage a more collaborative approach between master trusts and TPR.  

In a report explaining its new oversight plans, TPR said: “Through our expert-to-expert, risk-focused supervision approach, we will ensure we are asking the right questions at the right time to identify risks and challenges and support effective decision-making.”

This approach would bring greater clarity on desired outcomes and the reasons for actions and requests, TPR said. It also promised to “to feedback and learn from each interaction”. 

A transformative year

It’s almost exactly a year since designed to support what it calls a “prudential” approach to regulation. 

in November, Delfas expanded on this, telling delegates: “We are shifting to a more prudential style of regulation, addressing risks not just at an individual scheme level, but also those risks that impact the wider financial ecosystem.

“We are entering a different era of regulation that protects, enhances and innovates in savers’ interests, so that all savers – from every walk of life – can get good retirement outcomes from pensions.” 

While it still wants to keep a handle on how individual schemes are operating, the regulator also wants to stay ahead of industry themes, trends and emerging risks. 

As Delfas stated last week: “2025 will be a year of decisive action from the Pensions Regulator, with genuine and open collaboration and a focus on long-term outcomes for savers over tick-box regulation.” 

The prudential approach beyond DC

TPR is already flexing its muscles in this way, and not just in the DC space. Last year, it to the pensions sector and vowed to increase its engagement with these companies. 

The move reflects the growing influence of such firms over DB pension schemes in particular, and several surveys have detailed the growth of professional trustee appointments.  

More than two thirds (68%) of corporate DB sponsors told a Hymans Robertson survey last year that they would likely increase their use of professional trustees in the future. found that more than half (57%) of 152 DB schemes had appointed a professional trustee, . 

Elsewhere, administrators are also coming under more scrutiny from TPR. With the first connection deadlines for pensions dashboards rapidly approaching, data quality and technological capabilities . 

The regulator has been working with some of the biggest pensions administrators for some time, and to invite “10 to 15” of the largest providers to engage in further collaboration on a voluntary basis. 

TPR intends to work with in-house and third-party administrators to “better understand the challenges these administrators face and, through our active engagement, enhance outcomes aimed at protecting savers and enhancing trust in the pension system”, according to director of supervision David Walmsley. 

This area of focus has emerged after a government inquiry into the Norton Motorcycles scandal identified a regulatory gap when it comes to the companies officially responsible for administering pension funds. 

The regulator’s more focused approach is also evident in data collated by law firm Eversheds Sutherland, which has found that with pension professionals. 

The law firm also identified a decrease in data requests from TPR, but the requests that are sent are becoming more complex. 

A fragmented landscape

For several years – well before the chancellor coined the term “megafunds” – TPR has been calling for a reduction in the number of small pension funds, with “fewer, larger schemes” becoming something of a mantra. 

The data shows that the industry is moving gradually in this direction. TPR’s latest figures show that the number of DC schemes in the UK with 12 or more members has declined from 3,660 in 2012 to 1,080 in 2023. 

In the DB space, meanwhile, Pension Protection Fund data shows that the number of private sector schemes has fallen from 6,316 at the end of 2012 to 4,969 at the end of last year. However, this still means more than 6,000 separate pension schemes, as well as hundreds more ‘micro’ schemes with fewer than 12 members.The Value for Money framework currently being developed by the Financial Conduct Authority (FCA) is also expected to contribute to the consolidation of pension funds, with proposals to have poorly performing DC funds wound up and their members transferred to better options.However, the Value for Money project has also highlighted a major issue facing pension regulation: the fragmented nature of oversight. 

TPR’s reach is extending to administration providers and professional trustee firms, but it does not regulate contract-based pensions. These remain in the FCA’s jurisdiction, meaning the two regulators must work closely together to ensure a cohesive and consistent approach. 

Meanwhile, as DB schemes increasingly head towards the bulk annuity market, pension scheme members are moving from TPR’s watch to that of the Prudential Regulatory Authority, which oversees insurers. 

Some within the pensions industry have already called for all regulation to be brought under one roof, through the merger of TPR and the FCA. 

While there are no signs that this is on the government’s agenda, perhaps the next phase of consolidation could involve combining the multiple regulatory organisations’ resources more closely to support the prudential approach TPR is developing.