Will the regulator's new interventionism work?

In particular, it has taken issue with the increasing length of a number of recovery plans, where sponsors pay what the regulator considers to be disproportionate dividends in relation to the level of scheme funding.

Statements are one thing; the pensions watchdog will also need the right powers, free from political interference

The new approach is in its infancy, but we have already begun to see an increase in the level of regulatory involvement, through proactive cases and greater scrutiny of dividend policy.

So is the regulator’s new interventionism likely to be more effective than its previous approach?

Has soft-touch regulation worked?

To date, the regulator’s focus has been on educating and enabling trustees and sponsors to run their schemes more effectively; it has made sparing use of its powers to intervene directly.

Its move to a more interventionist approach therefore marks a significant change of regulatory style, though it is perhaps unsurprising given the public scrutiny of its role in high-profile cases such as BHS, and the deteriorating funding position of many DB schemes.

In truth, it’s hard to gauge the extent to which the regulator’s previous philosophy has improved outcomes across the board.

On numerous occasions I have seen it influence behaviours and outcomes, without needing to incur the internal resources and associated expense of proceedings using formal powers.

But many would say the regulator’s greatest challenge is regulating consistently.

Its guidance is often ‘cherry-picked’, meaning some sponsors and trustees can demonstrate that they are paying enough attention to the watchdog’s messages without fully taking control of the pensions problem.

A tougher regulator

For all that has been achieved by encouraging behavioural changes, it is direct intervention that grabs headlines and most clearly demonstrates how the regulator wants best practice to look.

Those that have simply blamed low gilt yields and increased longevity for ballooning deficits are now being encouraged to accept responsibility for a scheme’s situation by making greater use of covenant and investment risk-management tools.

For too long, trustees and their advisors have been allowed to focus on backward-looking assessments of the sponsor covenant and the current deficit, rather than on the sponsor’s ability to underwrite risk, both now and in the future.

Effective enforcement will necessarily require greater resources and funding for the regulator.

It was encouraging to see that it has been awarded some additional funding, but in truth it remains a modest sum in the context of the billions of pounds of risk being run by DB schemes and the Pension Protection Fund.

The zombie apocalypse

It is clear to all industry observers that there are, and have been for a while, a number of ‘zombie’ schemes.

These schemes have little prospect of paying full pensions to their members but have been allowed to run on without an obvious resolution, other than eventual sponsor insolvency.  

Running these schemes on misleads pensioners, employees, and investors over the threat to benefit promises and scheme sponsors.

We would welcome a more interventionist and proactive approach in this area from the regulator. This has now started to show through in its interventions over British Steel and Hoover.

Right powers essential

Intervening effectively, efficiently, and consistently will no doubt be a challenge.

Statements are one thing; the pensions watchdog will also need the right powers, free from political interference.

Given the outcome of the election and the focus that will be placed on handling the legislative impact of Brexit, it’s not clear whether these powers will be forthcoming.

This would be a significant political failing that could handicap the regulator's welcome desire to intervene more, and could ultimately be detrimental to members’ benefits.

Darren Redmayne is CEO at Lincoln Pensions