What is the current trajectory of The Pensions Regulator?

James Smith: Good afternoon everyone thank you for joining our webinar today. My name is James Smith and I am one of the partners at First Actuarial. I am chairing today's session.

We are going to look at the Pensions Regulator's Annual Funding Statement. We are going to talk through some broad themes and we have got some case studies to look at. We are then going to look at the things that trustees and employers can do and think about how things may develop in the future.

Marcos Abreu: Hi, I am Marcos Abreu. I am a scheme actuary and employer adviser at First Actuarial. I have got 20 years' experience in the pension industry and I will be talking later today about the Regulator's 2019 Annual Statement, as well as talking through some case studies, as well just to share our knowledge and experience and thoughts on the Regulator's direction of travel.

Elizabeth Gane: I am Liz Gane, I am a partner in the Pensions team at Gowling WLG with over 20 years' experience advising trustees and employers in relation to pensions matters.

Liz Wood: I am Liz Wood, I am a senior lawyer working in the Pensions team with Liz Gane at Gowling WLG and, like Liz, I advise both employers and trustees in relation to pension issues.

Elizabeth: Before we crack on with the main part of the webinar just a quick couple of minutes about our experience. At Gowling we have a team of more than 50 pensions lawyers fitting within a full service commercial law firm. The team has been established for more than 40 years so we have got a very wide ranging experience of advising trustees and sponsoring employers of pension schemes.

First Actuarial is a privately owned actuarial firm, it is owned and managed by the partners. They provide actuarial and investment advice as well as administration services to pension schemes. They have over 100 qualified actuaries and over 250 scheme appointments. Between us we have a combined wealth of experience of what is happening in practice.

Liz: I thought we would begin by taking a step back to when the Pensions Regulator was created, I think sometimes it is easy to forget that the Regulator was given much greater enforcement powers than those of the previous Regulator, through the powers that it was given in the Pensions Act 2004.

I think it is fair to say that for much of the period from 2006 and for the next ten years or so, the Pensions Regulator was focused more on education and upskilling for trustees and scheme sponsors in relation to occupational pension schemes than direct intervention and enforcement.

Liz: Whilst there were powers from the outset to issue financial support directions or contribution notices, those powers were not widely used. Instead, the Regulator tended to rely on the threat of such powers being exercised to get the desired behaviour from those running occupational pension schemes.

The beginning of the change to the Regulator's expectations was marked by the publication of the funding defined benefit code in 2014. This set out the expectation that all schemes would put in place an integrated risk management framework to ensure the key risks faced by the scheme are clearly understood, and understood alongside other potential risks faced by the business or organisation so that this delivers improved outcomes for the scheme.

I do not think it was a radical shift, in terms of the things trustees needed to be considering before and after this point, but really encouraging those managing schemes to take a more holistic approach to the questions of employer covenant, investment and scheme funding.

One of the key principles of the IRM process is collaboration between the trustees and the scheme sponsor as part of an iterative process of constant monitoring of the scheme's funding position as against its investment strategy and the employer's covenant.

I think it is fair to say that before 2016 we had that reinforced emphasis demonstrated by the funding code to ensure that trustees and scheme sponsors were horizon scanning to ensure that risks faced by the scheme might be anticipated as part of an integrated risk management framework.

What we then saw was a series of high profile corporate failures or restructurings that were reported and scrutinised in the national media, particularly in relation to the role of the Pensions Regulator and the impact on members of the associated defined benefit pension schemes.

We had the collapse of BHS in April 2016 following the sale, less than a year before, of the business by Philip Green's Arcadia Group for £1 to Dominic Chappell, which had been widely reported, with the trustees of the two BHS pension schemes having been very much been kept out of the loop in the lead up to that sale.

There was no ability for them to undertake due diligence on that sale and no clearance was sought from the Regulator. In response to the BHS failure, the Regulator recognised later that it did need to act more proactively and efficiently and be more outcome focused.

We then had the collapse of the contractor Carillion in January 2018. 28,000 members were affected, and afterwards it became apparent that shareholder dividends had been prioritised by Carillion over and above the funding of its pension scheme, which had been poorly funded for a number of years. And that the recovery plan put in place for the scheme associated with Carillion was just too long.

And again some really serious criticism lobbied at the Regulator saying the Regulator had been "united in its feebleness and timidity". It had been "too passive and reactive" to make effective use of the powers that it had. Whilst the Regulator had threatened on seven occasions to use the power to enforce pension contributions it never actually used it in practice.

"The Carillion directors knew it, and got their way", said the Work and Pensions Committee later.

I think one of the most interesting points made in the Work and Pensions Committee report on Carillion was that whilst stronger powers being made available to the Regulator would likely be of benefit, what was really needed was cultural change at the Regulator to move away from being perceived to be just a "paper tiger".

In the face of these corporate failures and restructuring there has been a general direction of travel which has been gradually moving in one direction. We have had a series of reports and enquiries and investigations (seen on this slide) into defined benefit schemes and the Pensions Regulator's powers.

Whilst the general consensus in 2017 in the Government Green Paper on Security and Sustainability in DB Pension Schemes was that broadly the Regulatory regime for DB pensions was satisfactory, there was also a general consensus moving towards increased powers for the Regulator being needed.

So we have seen the Pensions Regulator positioning itself as "clearer, quicker, tougher". I think this can be seen to be no less than a real and marked cultural shift within the Regulator to be more proactive and more assertive. To set clear expectations on scheme trustees and employers earlier on, and to take a tougher stance towards compliance and enforcement.

Marcos: Thank you Liz, I am just going to talk through the latest annual funding statement that was issued by the Regulator in March 2019.

To me it feels like that was a pivotal moment because since then we have definitely noticed a shift in terms of both level and the detail of Regulatory engagement.

Now some of you that are on the call today might be experiencing this yourself at the moment, so there are definitely signs of a tougher Regulator, for sure.

From an actuarial point of view I am just going to pick up on the key themes that emerge. The principal focus in the Regulator's latest funding statement was on schemes developing what has been called a "long term funding target" and this is to be introduced by legislation.In fact, only yesterday the Pensions Schemes Bill was going through the House of Lords.

There are a few steps for it to get through yet. Now this is not a new concept, though very much on top of the agenda of the last funding statement. This target is actually intended to be beyond what most schemes use as the current funding objective funding and we will see more on that later.

It is important for schemes to demonstrate how they will get to that long term funding target and would be good enough just to have a target journey plan. Schemes need to have a journey plan with milestones to demonstrate the progress towards the long term funding target. Perhaps not surprisingly, the statement reminds us that investments and funding strategies need to be aligned. Just a reminder that the scheme actuary and investment consultant need to work together.

The next point from the statement is this needs to reduce covenant reliance. There is a desire to get schemes to a point where they do not need to rely on the support of the employer. This, we think, is driven by the high profile company failings that Liz mentioned earlier on in the talk.

Contingent security in terms of contingent assets is still there. It has been there for a long time but we can see the focus shifting on that, so it is important for schemes to be able to call on the contingent asset in the event of sponsor failure. We are noticing that the Regulator is asking more questions around contingent assets.

In terms of a recovery period there is also a big shift in focus. Seven years was noted as the average recovery period in the last statement. We have noticed in our experience that since then - since March 2019, those schemes that have longer recovery periods, and this may often happen before the triannual valuation actually starts, have been receiving messages from the Regulator in terms of what are the trustees planning to do, to reduce that recovery period.

Just to finish off we think that there is a big focus on accrued benefits but obviously there are some open schemes still out there. It will be interesting to see if the Regulator makes more statements about what they expect schemes to be doing in terms of future accrual.

Finally, just to pick up on the point that Liz already made around the integrated risk management and for trustees to understand risk is really back on the agenda.

I am just going to pick up on the long term funding objective briefly. What we have got here is a version of a graph that the Regulator has used in some of its presentations. We have got investment risk plotted against time. The red dot on the left hand side shows where a scheme might be at the moment. They are taking some investment risk on the back of having a sponsor covenant that can support that level of risk.

What the Regulator wants you to think about is to get to the dot on the right hand side where, over time, you get to a point where you take less and less risk, very little in fact, and do not rely on the employer covenant.

Still speculating at this stage but what might that basis look like? For those of you that understand the "gilts plus" method you will notice that that is a very strong basis compared to what most schemes are funding for.

What that means is for schemes to have an investment strategy that targets a return of gilts plus of 0.5%25 margin. In terms of where gilts are at the moment that might only be sort of 1½‑2%25 level of return which is very low risk indeed.

In terms of the timeframe, I have been to some presentations from the Regulator and some of my colleagues have as well, and the Regulator has mentioned 10-15 years as not being an unreasonable period to get there.

Obviously, the maturity of your scheme might come into play. So you may have discussions with the Regulator - and they might be thinking in terms of much shorter periods. That will influence how they supervise the scheme forward.

How you get from A to B - obviously there are lots of ways and you need to think about that as trustees and sponsors - you can get there in a straight line approach.

That means you do your risk reduction very gradually. You might have some kind of trigger mechanism to get from one point to the other - you might may a decision now to take some risk off and then leave it alone for a while.

Or, just to be a bit provocative, you might just keep your foot on the pedal in terms of taking investment risk and then when you get to a point of being able to fund on that more prudent basis you change your assets at that point. You probably think that the Regulator is probably not going to like that orange dotted line just there.

In summary, there are going to be a number of factors that are going to come into play in terms of getting to that long term funding target and, it will also influence how the Regulator monitors your actuarial valuation. The Pensions Regulator likes this fried egg diagram. Essentially the system is called 'comply or explain'. They also refer to it as "fast track" or "bespoke". In essence, if your valuation falls into the middle and you comply, effectively you tick the box and you move on, but that might be on a very prudent basis. We think most people, most schemes are going to end up on the white part of the egg, on the 'explain'.

That means we do not know how that will actually happen in practice but most schemes will have to explain their strategy and if you are completely outside of the egg you can expect a knock on the door from the Regulator.

Just to finish off this section. Just to point out to those of you that are not familiar with the annual funding statement. The Regulator has grouped schemes into ten categories. The idea is for trustees to be able to place themselves into a category, and then there is some suggested actions that they could take. But, in summary, for me the bar just keeps rising because regardless of your group it means less risk, more money, shorter recovery periods and so forth.

My advice for trustees and sponsors is, if you have not done so already, get round the table with your advisors, formulate a plan for your long term objective and then you will be in a much better position to be able to answer questions from the Regulator. I have just laid out there some key points along the journey of your plan for consideration but I will not go through it today.

Elizabeth: Before we move on and talk about some case studies, I thought it would be helpful for us just to pick upon some broad themes, because we have heard from Marcos about what the Pensions Regulator is saying in its publications - about what it expects schemes to do, but I thought it would be helpful just to see what broad themes we are seeing in practice in light of that guidance.

Theme number one - both Gowling WLG's experience and First Actuarial's experience is that we have seen a very definite change of approach from the Pensions Regulator - much more proactivity, much more willingness to intervene in the operation of pension schemes. I would say that has been true across our whole client base so it is not just large schemes that are being targeted, but also smaller schemes and employers of all types, all sizes, whatever their background.

Theme number two - we have seen the Regulator become involved at particular points in a scheme's life cycle. Typically, it often hangs its intervention or its contact with trustees around the triannual valuation cycle, but contact can come at various points during that cycle. We have experience of the Regulator imposing conditions before it will sign off a valuation, so getting involved towards the end of the process.

We have also seen the Regulator become involved where it is actually effectively revisiting the valuation that it has already signed off and it is doing that in anticipation of the forthcoming valuation. Writing to trustees and saying "although we signed this one off last time actually we have got some concerns about certain things that were included last time, and for the forthcoming valuation these are the parameters that we expect you to work towards".

Theme three - it is not always events within the scheme's life cycle that pique the interest of the Pensions Regulator. We have certainly seen the Regulator becoming involved where there has been press reports. That might be profit warnings or it might be reports about an employer or, about trading conditions affecting an employer. All of those things might prompt the Regulators' interest. We have certainly seen them monitoring things more closely for schemes sponsored by employers operating in certain sectors.

Very recently, retail seems to have come under scrutiny - probably for obvious reasons. But also following the collapse of Carillion, we saw the Regulator writing to businesses who were either directly or indirectly affected by that collapse, asking them specifically what the impact of that collapse was on the particular industry, or the particular business in question, and asking what trustees were doing to monitor that and deal with any issues coming from it.

We are also seeing interest currently in media and publishing organisations and also not for profit employers such as trade unions and charities. Whilst our clients sometimes think that they are being targeted - perhaps unfairly, because of the environment in which they operate or because perhaps they are very high profile, our experience is that increasingly the Regulator is just looking to flex its muscle across all types and sizes of employer.

We will come on and talk about this final theme when we look at the case studies, but actually we are finding that the Regulator is asking for increasing amounts of information from trustees and scheme sponsors in order to be able to satisfy itself that all is as it should be.

What else are we seeing? Well, the Pensions Regulator is actively asking trustees for information on how they have weighed up the competing interest of the scheme versus the shareholders in their discussions with employers.

Secondly, any letter that trustees seem to receive from the Pensions' Regulator now seems to mention integrated risk management almost as a default question. It wants to know that trustees have a process in place and that they have done scenario testing.

The Pensions Regulator is also more likely to challenge where there is a long recovery plan in place for a scheme, by comparison with the average recovery plan length of other schemes supported by employers with the same covenant rating.

For example, they might say, on average, an employer with a "tending to strong" rating has an average recovery plan length of five years. Your recovery plan is longer than five years, please explain to us why it is longer than five years.

And then, just finally, to round up on themes, we have also started to see the Pensions Regulator saying to trustees in open correspondence that they will look to use their powers under the Pensions Act 2004 if trustees and employers do not co-operate with what the Regulator is asking for.

The key powers it is threatening to use are under Section 72 of the Pensions Act 2004. This is around the provision of information. And also Section 231 of the Pensions Act. Those are quite wide powers, so the Pensions Regulator can impose a schedule of contributions or it can direct what the technical provisions should be for the scheme, or it can specify the recovery plan period.

I have certainly heard it said that the Pensions Regulator does not actually have enough time or resource to use its powers in all of the cases where it threatens to do so, but what it is hoping to achieve by sending out these letters is if it threatens to use its powers, trustees and employers will fall into line.

I have to say it is probably going to be a fairly brave set of trustees who wanted to test that theory out, and certainly, anyone who has been on the receiving end of the Section 72 notice would probably recommend not testing the theory, because they are notoriously time-consuming and notoriously expensive exercises.

Liz: We are now going to talk through four case study examples, looking at this from the perspective of both employer and trustee clients, bringing to life our experience of how the Pensions Regulator is intervening in a range of situations.

The first one I am going to talk about is the experience of a large, not-for-profit employer client. It has an open defined benefit scheme, which it wants to keep open, but it is also operating in a challenging environment for its organisation and for others like it.

The Pensions Regulator was already involved when the last triannual valuation was agreed in 2018. The Regulator is particularly focussed on the strength of the technical provisions, particularly the discount rates. The investment strategy, particularly the exposure to growth assets. The employer covenant - the Regulator expressed some concerns that the covenant could not support the investment risk or the funding of the scheme, assuming it remains open to accrual. And the recovery plan, which it considered to be too long at 18 years.

These different areas of focus are very consistent with our experience of the Regulator's scrutiny of other pensions schemes, often honing in on the employer covenant, the investment strategy and the length of the recovery plan, in particular. The Regulator here, before that valuation was completed, set out its conditions, or expectations, for what must happen during the next valuation cycle.

The employer here was required to undertake a wholesale review of its current pension arrangements, particularly to consider how it might structure future benefits to ensure that what the Regulator considers to be appropriate DRCs (deficit reduction contributions) are made to the scheme. The Regulator remains very much involved in that review seeking regular updates from all stakeholders, including attending review group meetings. The Regulator is very much setting its expectations here around future benefit design, which is much more proactive about this than we have seen before.

The Regulator also required here that an independent professional trustee was appointed to the scheme. The Regulator was very proactively involved in the appointment, both agreeing a shortlist of proposed independent trustees and meeting with the trustee before they were formally appointed.

This is consistent with a number of cases we have now seen for other clients where they too have been asked to put in place an independent trustee.

In this case, the scheme has been placed in what the Regulator calls "relationship supervision", which I'll talk a bit about in later, but essentially, the scheme has a key point of contact at the Regulator, The Regulator is using relationship provision as a means of developing a close working relationship with schemes that are considered to be of strategic importance to it. Essentially, I think this is around assessing the key areas of the scheme's operation. Is everything working as it should be?

For this scheme, the relationship supervision may not be the end of the story. The Regulator has here indicated it may consider exercising its Section 231 powers in relation to the scheme, particularly if it is not satisfied with the outcome of the pensions review process. And, in our experience, and that of other clients in the pensions' teams at Gowling, once an investigation is opened, the Regulator can pretty swiftly move to the imposition of a Section 231 notice.

This case study remains very live. I do not know where the scheme sponsor and trustees will ultimately get to, but it might be worth adding as a final point on this case study that the tone of the Regulator's engagement over the past year - particularly in its correspondence, but also in its dealing with the trustees has been very proactive, very assertive.

The letters that we are seeing from the Regulator to the trustees and scheme sponsors are markedly different in tone and content from what we might have seen several years ago.

Marcos: Case study two is a case we have where the actuarial valuation has been completed and then the Regulator has then started asking questions of the trustees.

Now this particular scheme is a closed defined benefit scheme. It is fair to say that they invest most of their assets in growth-type assets such as equities. Now, the investment strategy itself has not really been challenged by the Regulator to any great extent, so it came as a bit of a surprise the level of questioning that has been taking place so far on this valuation cycle.

On the face of it, we have got a very, very strong covenant backing this scheme. We have got an employer who has enough cash to meet the buy-out deficit, several times over, so the buy-out deficit is not what the scheme runs for, but it is the much higher target if they were to go to an insurance company.

Not many schemes in the country can really point to that level of backing from the sponsor. In fact, this particular sponsor just with one year's profit is able to meet the buy-out deficit, just to give you an indication of the strength. It also has excellent prospects in terms of the client-retention that it can point to, and guaranteed future cashflows.

In the past, you would not expect this type of scheme to really get that much attention from the Regulator. But there is definitely - so far - strong direction from the Regulator that this scheme should be taking less investment risk and they are really playing the "low-reliance" argument, which was what I tried to demonstrate in the graph earlier, so suggesting a much less risky investment strategy.;

One other interesting point throughout this case study is that this particular employer, if there was upside in terms of returns on its investment strategy, is happy to share that upside with the members in the form of discretionary increases, so one could argue that if the scheme decides to take less investment risk going forward, they will not be able to possibly pay those discretionary increases to members, so members might in fact lose out. I just wanted to leave that thought with you.

Liz: Moving on to case study three: this is a trustee client. The scheme was first brought to the Pensions Regulator's attention in the summer of 2018, when the Regulator picked up on some press reports about difficult trading conditions relation to the sponsoring employer. The sponsoring employer operates in the sector that the Regulator has been quite interested in.

The engagement was fairly innocuous to start with. The thrust of the initial engagement was just to understand the trustees' approach to covenant monitoring, including whether any mitigation was required in the light of the difficult trading conditions.

The Regulator also asked what independent advice the trustees had had in relation to covenant and how the trustees intended to ensure that the scheme was treated equitably in agreeing any recovery plan.

The valuation was due to be signed off at the end of 2018. The Regulator gave the trustees 14 days to respond to that letter, but the trustees took the approach that they were going to comply with that timetable and they were going to be very open and upfront with the Pensions' Regulator, simply setting out a factual response.

The trustees had hoped, obviously, that the Regulator would leave them alone at that point, but that was not to be the case. The Regulator came back and asked for copies of the covenant review, copies of the affordability report and asked to be kept in the loop on any discussions with the employer. The trustees again co-operated.

They outlined their current thinking on the valuation process, the reasons for it. They asked the Regulator whether it has any questions that it would like to raise with the employer, and in response to that, the Pensions' Regulator responded in writing with several observations on the approach that the trustees were taking.

It suggested that they needed to obtain an updated covenant report, because the one that they were working from was six months old, they considered that the covenant assessment that the trustees had had which said that the employer was strong was not correct.

They asked for analysis, showing the relative recourse to the competing creditors in a restructuring or in an insolvency scenario; they asked the trustees to consider whether the funding basis and the recovery plan was still appropriate in the light of the concerns. They asked that covenant-monitoring protocols and contingent mechanisms were agreed as part of the valuation discussions. Essentially, the Pensions' Regulator wanted to approve all of the trustees' decisions before it would sign off on the valuation.

It then summoned the trustees to a meeting in Brighton, along with their covenant advisor. The Pensions' Regulator turned up with their case manager and two business analysts. I think it is fair to say that during that meeting the trustees and the covenant advisor pushed back very strongly; they were very robust in their defence of the approach that they had taken, and the result was that some of the requests that the Regulator had originally made were dropped as part of that.

For example, the Regulator did not require the full insolvency analysis that they had initially requested. Following some further back and forth with the Pensions' Regulator, the trustees were required to provide further covenant documents. They had to change one aspect of the valuation proposal which the Pensions' Regulator said was not appropriate, and there was a very strong direction from the Pensions' Regulator that it wanted to see a formal integrated risk management process put in place with contingency planning around that.

The upshot of all of that was that the valuation was signed off but it was done on the last day before the deadline. You might think that the Regulator would have dropped things at that point. But no, they requested a further meeting, so by this time, we were in January 2019, and the Regulator wanted to check that the integrated risk-management process and the contingency planning was indeed underway and being put in place.

Fast-forward a few weeks, and the employer put a proposal to the trustees which involved the reorganisation of some of the businesses and including some proposals for flexible apportionment arrangements for some of the employers that participated in the schemes.

The Pensions' Regulator insisted at that point on being in the thick of negotiations and said to the trustees that they should not agree to any flexible apportionment arrangements until the Pensions' Regulator had okayed them. They asked to see the legal and covenant advice around the FAAs at that point. The trustees sort of carried on negotiating with the employer, and they negotiated a very sensible agreement with the employer. The trustees took full advice from its advisors, in particular, its covenant advisors, and it looked for sign-off from the Pensions Regulator at that point.

At that point, the Pensions' Regulator, having taken the trustees through a very, very tight timetable, then stopped responding. It went very, very, very quiet. They were ignoring calls, they were ignoring emails, and it took around six months to get the Pensions Regulator's agreement to the flexible apportionment arrangements.

Interestingly, there were no changes, so they did not object to what the trustees had actually agreed. There was a huge amount of delay with no apparent benefit or reason for that. The FAAs were eventually submitted at the end of 2019, almost a year after negotiations first started. The Pensions' Regulator's response to that, instead of just signing them off, have now sent back a whole ream of questionnaires for the trustees to complete, asking for all of the information that was already provided as part of the original negotiations. We do not know whether that is because the submission of the FAAs went to a different part of the Pensions' Regulator.

So, our experience on this is we have had a very co-operative set of trustees, a very co-operative employer, we have an independent trustee already appointed to this board, third party advice at every turn, and the Pensions' Regulator seemingly will not let go of its grasp of this scheme. More than 18 months on from its first involvement, here we are, still having to deal with the Pensions' Regulator.

Marcos: So, on to our last case study, and we do not intend to spend a lot of time on this, but I think it does bring together a lot of the things that we talked about today. This is a small defined benefit scheme and it has a long recovery period in terms of the recovery plan. You would expect this scheme to get some attention now, but perhaps the level of detail that is been asked for is what has been quite surprising. This particular scheme had done an independent covenant review so it was not just enough this time to say that you have taken that advice and just given the Regulator the rating that you come up with.

The Regulator has asked to see the covenant advice. They asked to see some documents that was used for the actual advice itself and then asked very specific questions about profit since that advice was taken, both in terms of what has subsequently actually happened between and in terms of future projections.

Another point that we have already mentioned today is this idea of contingent plans. This is not a scheme that I advised personally, so I do not know if this scheme has or has not got contingent plans. But I suspect there will be a number of schemes out there that do not necessarily have contingent plans already to show to the Regulator.

There is a shift in the amount of detail that has been asked. As I have mentioned earlier, this scheme also has a contingent asset and the level of questions about the contingent asset itself are much more detailed. It is not simply the Regulator accepting that you have a contingent asset but asking for a lot of supporting detail.

In terms of the investments he Regulator wanted to see cashflows from the scheme, so perhaps they are thinking of running the valuation themselves. The theme that we touched on quite a lot today, is they asked for a copy of the integrated risk management advice.

Now, certainly not every scheme out there necessarily has an integrated risk management framework in place and possibly if they have, it is not something that is easily documented and ready to pass to the Regulator.

A lot of themes that we have talked about today have been seen here. This is also just a reminder that this is a small scheme so they are also getting contacted by the Regulator.

Liz: So hopefully the case studies have given you a flavour for what we are seeing from our respective clients' perspective. I think it is evident there has been a sea-change in terms of how proactive the Regulator is seeking to be in terms of its scrutiny of many occupational pension schemes, regardless almost of the size of a scheme, or the industry or sector the employer operates in.

As we have seen, in some cases the Regulator is intent on intervening, even where there is a strong employer and the scheme is been a positive funding position, as in the second case study.

It might be helpful to talk through briefly what the Pensions Regulator's scrutiny might look like on a day to day basis. In terms of the general principles once the Regulator wants to become involved with a scheme, it will liaise with the trustees and the sponsoring employer. It may leave the trustees and its advisors to do the work of engaging with the company but it will keep an eye on how that is going and may set up a case team internally to review progress.

That case team will be made up of a lawyer, actuary and accountant and if they have concerns with the direction of travel, we have seen them turn up in numbers to various meetings, with all the different skills represented.

We have seen increased amounts of 'relationship supervision' as I mentioned in the first case study. The Regulator mentioned, in one of its quarterly bulletins of 2019 there were 35 schemes in the early part of last year in relationship supervision. The Regulator expects that to increase to more than 100 schemes into 2020. We know that the Regulator now also has separate rapid response and events engagement teams, which respond quickly to events which pose increased risks to schemes.

In terms of the Regulator's scrutiny, we have seen from the case study examples, increased requests for information. That tends to be on a voluntary disclosure basis and sometimes we get asked whether the Regulator can legitimately ask for this much information. But I think what we are seeing is that the short answer is, within reason, the Regulator actually can ask for whatever it wants as long as its relevant to the exercise of its functions.

In our experience, in most cases, it is probably better to be seen to assist the Regulator rather than frustrating it. In practice, we generally find employers do provide much of the information requested, to just keep it onside and to show that really there is no cause for concern, that management of the scheme is going well.

We have mentioned several times the importance of an IRM framework that continues to be seen in Regulator correspondence and we have also seen that one area we keep seeing coming up time and time again is the Regulator scrutinising covenant advice and covenant reporting.

We would recommend that trustees, where possible, get external third party covenant advice rather than relying on doing that in-house and also brace themselves for potential Regulator scrutiny to justify where they have come to in terms of assessing that employer covenant.

I have also mentioned that the Regulator really likes appointing independent trustees to a number of the schemes that we have seen.

The knock-on effect practically of this is increased costs and time and resources for sponsors or trustees in terms of dealing with the Regulator, responding to all these requests for information. As Liz alluded to in her case study, we have seen that very much the Regulator will operate to its own timetable. Sometime it will be very proactive, but at other times, the sponsor or the trustees might be really desperate to get a Regulator response and the Regulator actually has decided that the scheme is less important than other things that it might be looking at and it may have slipped down that timetable.

In terms of future developments, Marcos mentioned that we have now got the much anticipated Pension Schemes Bill weaving its way through parliament. I do not know when that exactly is going to be bought into force but there does seem to be general consensus that that will come into force at some point in the midst of other parliamentary business.

The new Pension Regulator powers include new power to issue civil penalties for up to £1 million for serious breaches of pension requirements and three new criminal offences - intended to target individuals who wilfully or recklessly mishandle pension schemes. We also, of course, have the long expected update to the Pensions Regulator's defined benefit funding code of practice.

That is all we planned to cover today.

James: We have had plenty of questions come through, so we have covered a lot there and we are up against time but we will run through as many of these questions as we can.

The first one, are you seeing a consistent approach across schemes by the Regulator? It seems to vary quite significantly in similar situations depending on the team at the Regulator.

Elizabeth: Yes, my experience certainly is that is indeed the case. We have experience of certainly much more proactive engagement on some schemes without any particular rhyme or reason. I think it does depend on which case team you get and perhaps how much time they have on their hands.

We have heard that the Regulator has increased the number of people working there by some 200 people in order to try and give it the resource that it needs to deal with the increased engagement that it is having with schemes. I think the inevitable consequence of that is that it is going to be very very difficult for the Regulator to maintain any kind of consistency across the board. I understand that the Regulator is working on that by providing training and making sure that there are internal protocols. We have not necessarily seen those come through in practice yet.

James: Thank you. Next question . What support can the Pensions Regulator give to trustees where the UK plan is part of the global group and dividends exit the group much higher up the structure and outside of the UK? How can the Pensions Regulator help?

Marcos: Is it worth mentioning the new penalties for directors companies. They will be part of the Pensions Bill. Effectively there will be much higher penalties even prison sentences I think, is that right?

Liz: That is absolutely right Marcos.

James: Next question. Do you envisage the Pensions Regulator will use Section 231 powers to create an insolvent scheme scenario effectively forcing the trustees to exercise their wind-up powers and to terminate the scheme?

Liz: That is a good question. I do not know. But what we do know is that the powers the Regulator has under Section 231 are more broad than you might think and we have certainly seen the Regulator in our day to day experience suggesting that it might use the Section 231 powers in ways that we had not necessarily anticipated were possible under the legislation.

For example, tapping into reserves of other participating employers in connection with the scheme, where you might have normally expected that maybe contribution notices or possibly financial support directions might have been used previously.

Of course, the other aspect that sometimes gets forgotten is that the Regulator has the power under Section 231 to even impose what a future benefit structure of the scheme might look like for the future for those schemes that are open. So again, I think this is the tip of the iceberg at the moment in terms of how the Regulator might seek to be creative before the Pensions Scheme Bill comes into force around how it uses those existing powers.

James: Next question - you mentioned that the Pensions Regulator said that the covenant assessment for one of the case studies strong was wrong. Is it normal for the Regulator to think it knows better than professional advisors?

Elizabeth: It certainly happens quite regularly and I think perhaps more regularly than you might expect, particularly where you have got independent third parties appointed. I have, in fact, seen one situation where the Regulator took such a strong stance that it went on to appoint its own covenant assessor and then told its own covenant assessor that the covenant assessment was wrong as well.;

It does not necessarily believe anything that it is told by third parties.- It clearly has experts on the inside so there may be good reasons behind that. But it certainly - from a trustee perspective, from an employer perspective - as Liz mentioned, it just has the impact of ramping up the costs. I am not quite sure what trustees can do about that. If you appoint an independent third party advisor, you would expect to be able to rely on that advice.

Liz: Yes and I think it is fair to add that in many cases the covenant advisors we have seen are, you know very mainstream, they are very well known, they are very well respected covenant advisors, so I absolutely would echo what Liz is saying. It seems to happen time and time again that the Regulator just comes back and says they not satisfied with where the covenant report has got to.

Elizabeth: We have seen it with other advisors too. We have certainly seen the Regulator say that they did not like how an independent trustee was operating, for example, and have replaced an independent trustee on a matter that I am aware of.

James: Final very quick question. Does the Pensions Regulator pass on professional costs?

Marco: No.

Elizabeth: No it does not.

James: Unfortunately we have run out of time. Thank you all for joining the webinar and thanks for all your questions. Sorry we did not have time to get through them all. Thanks very much for our excellent three speakers. If you do have any further questions all three will be very happy for you to get in touch with them directly and ask those questions then.

James: Thank you once again and goodbye.