Adam Cadle speaks to The Pensions Regulator’s chief executive Bill Galvin about its latest DC consultation and the regulator’s plans and aims in the DB sector

With the implementation of auto-enrolment and ongoing attempts to improve DC governance, has the profile of The Pensions Regulator (TPR) been raised in the corporate world?
There is no doubt that it has. But the most important thing is not so much that people know who we are, but that our message about preparing in good time is getting through. Previously, we were dealing with about 200,000 employers. Now we have to deal with about 1.3 million more employers; and more and more people are hearing about us and what we do. The regulator is talking to employers, trustees and pension scheme providers about what they need to do for effective implementation and preparation of auto-enrolment - and also about the standard of DC schemes that they are going to enrol people in to.

Recent figures published by the regulator show that just 51 per cent of medium DC schemes and 18 per cent of small schemes display necessary features for good DC retirement outcomes. How confident are you that TPR’s latest consultation on DC governance will improve this?
Auto-enrolment is a watershed in pension provision. We are focused on trying to ensure that employers make sensible decisions because the industry that emerges in 2018 onwards will be very different to today, and the main driver of that is employers’ decisions. The regulator is trying to work on the supply side - in both trust and contract-based schemes - to assure employers that compliance is met with the regulator’s six DC principles, so that the employer does not have to worry too much about the suitability of the scheme they are choosing, and to take the burden off them.

The NAPF criticised TPR after contract-based schemes were excluded from new occupational DC rules. What is your response to this?
Trust and contract-based schemes are set up using different legal frameworks and have different accountability structures. The regulatory framework that sits over them, including the legislative underpinning, is quite different. It is over-simplifying to say there is a set of regulatory features that apply universally to trust and contract-based schemes at the level of detail that we are talking about in our codes and guidance. The FSA have responsibility in the contract-based space. The areas that The Pensions Regulator and the FSA choose to focus on may not always be the same - but where we do agree that elements are important for both the regulator and the FSA, we will work together to deliver against those.

Separate attention has been paid to master trusts in the DC consultation document and TPR has proposed a new regulatory framework. In order to ensure the effective governance surrounding these, should an industry quality mark be introduced? Independent assurance could prove costly.
Master trusts have the potential to work well for employers who don’t really have the time, scale or expertise to set up their own governance arrangements. There are about 50 of them in the market at the moment and how therefore should employers know the difference between the better ones and the ones that do not have effective governance arrangements? We believe an independent form of assurance against our six principles would be helpful, using an audit framework. This exists in other areas of third party service provision. In the consultation we outlined that there would be a cost attached to this. However, most of these institutions are large ones and tend to have a significant amount of scale and therefore the cost per member would not be that great. We also believe that it would be a proportionate cost given the importance of having high quality provision in this space.

Scheme data quality is obviously an essential issue in the overall running of DC schemes. How has data quality developed since the beginning of 2012?
We have made a big deal about this for the last two years or so. Back in 2009 we were concerned about the standards of administration generally in schemes that would shortly have to deal with one of the biggest administrative challenges posed to the industry: auto-enrolment. There were issues surrounding deferred members in particular and the quality of data that supported some of the key transactions we felt was not good enough. I am pleased with the substantial progress that has been made. The larger schemes have almost universally dealt with the issue and are in good shape. It is still a bit patchy over the smaller schemes. You are much more likely to be in a less well governed scheme if you are in a smaller scheme so that is where the challenges are. In February, we will survey where the industry has got to in terms of data quality. Having good data is a fundamental part of good internal controls.

Turning to the DB space, what are your aims in this field for 2013? Do you expect that many DB schemes will have to amend their recovery plans in order to meet long-term liabilities?
Every year a third of pension schemes go through their triennial valuation, which works out to 2,000 DB schemes every year. They then have 15 months to come to us and talk about the steps they are taking. Right now we are dealing with schemes which have valuation dates in December 2011 or March 2012. We issued guidance last April of what shape we expected them to be in. We are finding that, as they come into us, the early indications are that many trustees and employers are finding ways of dealing with the real challenges that market conditions are posing. Our priorities are on working with those schemes so that they understand our approach, and they put sensible recovery plans in place. It is important for them to address the risk that they are taking in their investment strategies and also to ensure that the length of their recovery plan is supported by the strength of the employer.

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