The Pensions Regulator plans to extend its reach

Small and medium pension schemes are to be brought closer into the regulator’s orbit, facing the same requirements as larger schemes, and with some to be assigned a dedicated supervisor.

Mr Fairs said the regulator may recommend smaller schemes wind up and join master trusts if, after being subjected to greater regulatory scrutiny, they cannot convincingly deliver good governance and value for money.

“We are going to challenge those [smaller] schemes over the next year to see whether they are actually offering good governance, good value for money for the members in the scheme. Where that’s not the case, we will encourage them to move towards master trust,” Mr Fairs said at the SEI Investment Conference.

We think we need to make life a little bit more uncomfortable for those trustees that just ignore our requirements

David Fairs, The Pensions Regulator

The logic underpinning the plans is that, while larger schemes with more members are currently subject to tougher regulatory supervision, it is the small and medium-sized schemes that are most likely to encounter governance and funding problems.

The regulator is already in communication with the 20 largest schemes – who have a one-to-one supervisor – and plans to extend that to 40 schemes this year. 80 plans will experience more intense engagement efforts.

TPR conducted an engagement study of small and medium schemes, finding that many trustees deleted emails before reading them.

“We discovered that when we send them emails, some of those schemes actually delete our emails without reading them. That's not a good thing for a regulator when your regulator community delete your emails,” Mr Fairs said.

He sent a clear message to trustees who thought they could avoid the reach of the regulator: “We think we need to make life a little bit more uncomfortable for those trustees that just ignore our requirements.”

The industry response to extending TPR’s engagements was largely positive. Anna Copestake, a partner at ARC Pensions Law, said: “It’s clear that the old saying of being ‘beneath the radar’ really is falling away.”

She continued: “As an industry we are guilty of thinking that a regulatory risk-based approach means simply concentrating on schemes with the biggest number of members or assets. But that’s often not where the greatest risk really lies. So this is a welcomed new focus by TPR in my view.”

But Ms Copestake also urged “there’s a balance to be found”, adding: “Being small doesn’t automatically mean a scheme is poorly governed and not delivering to members.”

She continued: “So the hope is that TPR focuses their efforts on smaller but underperforming trustee boards, ensuring they use their regulatory resources where they can make most impact, and not unnecessarily increasing the regulatory burden on smaller schemes who are operating well.”

It’s clear that the old saying of being ‘beneath the radar’ really is falling away

Anna Copestake, ARC Pensions Law

Jerry Gandhi, director of CAP Services and Schneider Electric’s UK and Ireland pension manager, had some reservations about the plans.

The regulator, he said, needs to reorientate itself to fostering positive outcomes, rather than just directing its energies towards avoiding negative outcomes. He warned that a regulator that seeks to avoid calamities – like Carillion’s collapse last year – might be discouraging trustees from taking risks.

“The challenges for the regulator seem to be a need to be ‘prescriptive’ in a lot of what it issues – and although this can be useful it drives, in my view, too much of a box-ticking mentality,” Mr Gandhi said.

He continued: “Risk taking is needed if evolution or even revolution in management and delivery of pensions schemes is to drive up member confidence in pension provision and ultimately pension outcomes.”

He said the regulator should establish a bank of “best practice” examples trustees could draw on.

He added that “the regulatory framework is stifling willingness to take risk”, which could have long-term negative consequences for members in retirement.

Within the defined contribution market, 70 per cent of DC pension schemes only represent 0.1 per cent of total UK pension savers. Mr Fairs said that with this in mind, the case for master trusts to play an important role in the future was strong.