Architect of a brave new world

With upwards of 7m new members of occupational schemes likely within the next few years, the role of chief executive of the Pensions Regulator is an increasingly significant public post. The last six years has seen TPR take on comprehensive powers in the DB space, but it is in the DC space that the next phase of expansion will take place.

For Galvin, who took on the permanent post in June, having been acting chief executive since last May, the reality of auto-enrolment has just taken a significant step forward, with the sending out of the first letters to employers telling them their duties will kick in in 18 months time. “I signed the first four – I won’t be signing the other 1.3m – but the four biggest employers in the country have now received them,” says Galvin.

For advisers, auto-enrolment will mean actually communicating the value of saving in a pension to many of the millions who will be nudged into plans for the very first time. So how will Galvin police this area?

“Most of what we do is judgment-based regulation. There are no hard rules about when you cross over a line by skewing a story so much so there is only one obvious answer for employees. If someone was skewing the picture on purpose, we would do something about it,” he says.

“The test we live by is that we need to be reasonable in everything we do. That definition of reasonable we are judged by might equally be held to apply to advice – taking account of all reasonable factors and not taking account of unreasonable ones. If the purpose of what you are doing could be construed as getting people to opt out, we will have a look.”

As to other areas of soft coercion, Galvin says these issues will be ironed out nearer to launch, but the regulator could also take retrospective action.

“As we go through auto-enrolment it will become evident that there will be ways people can game the system. The way the inducements to opt out legislation is written is quite broad, and it will be up to us to put guidance around what we think is acceptable conduct. We will do that in advance but we will also do it in response to what we hear from the floor. But as we go through we are going to run a pathfinder in the early stages of auto-enrolment in 2014, to get a feel for the type of issues facing small employers.

So could high consultancy charges that take a big chunk out of early years’ contributions, thus making them unattractive, be something TPR will look at, either as an inducement to leave or in terms of making a scheme non-compliant?

“The test we live by is that we need to be reasonable in everything we do”

“Nest is going to have a big impact in the market place, by providing a benchmark, not in a legislative sense, but for employers and individuals to see an option. So for schemes that are manifestly not providing as good value, advisers are going to have to demonstrate why they are not going to go down that route,” says Galvin.

Given his professed interest in transparency of charges going forward, how does the regulator perceive active member discounts?

“I would like to see pressure on AMDs. If AMDs are designed just to get more money from deferreds because they are an easier targets, that is difficult to justify. Deferreds are a challenge for the industry and it is going to have to find ways to deal with them that I hope will not be based on AMD structures. Some schemes have shown they are thinking of rolling people out of occupational schemes and into personal pensions, making it obvious to people they are outside the scheme,” he says.

Does Galvin think enough work has been done on default funds, given the way millions of DC members were exposed to enormous levels of risk during the financial crisis of the last three years?

“Nest is driving good practice, particularly in the investment space. You can see that as well at the top end of the contract-based market. We would hope auto-enrolment will be a catalyst for all employers to look at their schemes and to look at the scheme they will be auto-enrolling people into in this context.”

But a cynic might say that will not help most people in schemes that are unlikely to be substantially changed in the years to come. Should the regulator write to employers to say ’is your default fund appropriate?’

“The DWP has given guidelines on default funds and the FSA has said it is up to the provider to be able to stand up and say its default fund is appropriate. That is the start of a focus on the suitability of default funds generating good outcomes for members. We have put a discussion paper out and are working on the responses. I don’t anticipate any heavy-handed regulatory action in this space, because that is a bit close to product regulation and we don’t think that is hugely effective. I would hope it’s on a route that’s getting better, but I would not defend a lot of what is there at the moment,” says Galvin.

And what is Galvin’s view of the increasing role intermediaries are looking to take in the investment space, particularly with regard to blended default investment solutions?

“We are working closely with FSA and DWP to figure out what the right response across the piece is. And one of the things that is keeping us quite busy now is keeping abreast of all the new launches of products and services, and advisory structures coming on to the market to take advantage of auto-enrolment. We won’t be saying this product is fine, but that is not.”

“As to the role of the EBCs, as long as somebody is standing up and saying ’yes we are making this decision in the interests of the members’, that is a challenge in that space. I notice that at least one of the EBCs has come to market with a product where they indicate a willingness to take on what they call some of the employers’ fiduciary duties.

“We are interested to understand things like that – who is actually making the decisions, and is it the members decisions that they are putting at the forefront of that decision making process,” he says, referring to Mercer’s new proposition,” he says.

For Galvin, that potentially includes getting into advising on investment management.

“I think certain advisory structures, whether it is providing advice, administration, fund management or even access,” says Galvin.
Does Galvin see corporate wrap as being a positive step forward for members interests?

“It provides some challenges for transparency in terms of all of the issues we have talked about, such as charging structures and conflicts in the delivery up our structures. But it does bring a lot of benefits in terms of member engagement, communication and choice, and as long as accountability is clear and if it is clear ultimately who’s making the decision in the interest of the members, then it’s okay.

“There are a range of structures in this space. Where a provider is providing products and services into these things they are clearly subject to the FSA’s treating customers fairly regime and we will expect links between the employer and the provider to be very clear on where the accountability sits, and in the higher end of the market a sophisticated employer /buyer can generally make that happen,” he says.

Does Galvin accept the media view that the investors behind the Silentnight restructure have got away with it?

“Because this scheme did not come to us for clearance I have no idea whether any of those conditions [for recovery of money that should have gone to support the pension scheme] were met but we are looking at it. And if there is a case to answer we will be very robust.

“Is this a symptom of a phase where we are more pressure because of corporate restructuring? History has shown that, in the United States at least, it is the on the way out of recessions or downturns when the banks and corporate have a bit more visibility about future or future cash flows, and are able to make a few more calls about what businesses are viable and what aren’t, so I do anticipate that as banks start to look at their credit portfolio it will become clearer which companies are actually in a more permanent downward trend so some decisions will be made that will put some pension schemes in a difficult position.

“Having said that, over the last 18 to 24 months we have seen an increase in corporate insolvencies, but most of them have been for DC schemes.”

And should recovery plan lengths shorten as deficits reduce in light of the switch from RPI to CPI?

“We have been pretty clear about that. If the liability goes down and then companies don’t use that as an opportunity to reduce the amount they are paying into the pension scheme. They simply pay it back quicker,” says Galvin.

But asked if he has an upper figure for recovery plans, given some are rumoured to be 17 years.

“I have heard that number before. I don’t know where you pick that number from” he says. “People have come to us with recovery plans of 40 years, in some fairly high profile cases. And we have looked at them and said actually, what this is telling us that the whole situation is unsustainable so you need to go away and think again,” says Galvin.

How the DC system looks in 17 years’ time could be in no small part down to how Galvin shapes it.