POINTS OF LAW Question time
Robin Ellison, Pinsent Masons, has some questions for the Pensions Regulator to consider
One of the board members of the Pensions Regulator very properly gave me a dressing down a little while back. Criticism of the Pensions Regulator needed to be balanced to take account of the fact that it was in the process of major internal reform, she said (that is not giving her identity away – most of the board members are women; take that, the 30% Club!). And, she added, I should be aware of the fact that it is all too easy to complain, but a little less easy to take action.
Her points were well made, especially as she made them while I was mid-rant. Ranting, of course, is not the way to articulate a view. It lacks balance and coherence and it reflects anger, not a pretty condition. And although we are living in an age of anger post-Trump and post-Brexit, it is no excuse.
So, if the board were indeed reflecting on a fresh strategy for the Regulator (as it seems to be), what might be on the agenda when it disappears (as it should) to a comfortable hotel for a weekend in the Chilterns to think great thoughts? Here are a few suggestions. . .
1 What is my constituency?
Most regulators are there as a way of allowing government to blame someone else for a failure to protect. What does a pensions regulator protect? It was invented as a political response to some failures in the past and its major constituency is the consumer, ie the member. But it also protects the Pension Protection Fund, which gives rise to pressures of conflict of interest. And it has to maintain the commercial survival of the plan sponsor – there is no point in having a strong pension scheme even as its members are unemployed. There is therefore rarely an ideal solution to consumer protection. A regulator has to make value judgments, which with hindsight will invariably be wrong. Board members might reflect on the experience that shows that a regulator can do very little better than trustees can – and probably rather worse – and certainly more expensively. The Regulator’s role was invented as a response to political circumstances of a quarter of a century ago, and may now be past its sell-by date; and it has had a few extra responsibilities dumped on it over the years. So it may be time to say to government that the normal checks and balances imposed by the constitutions of the scheme, with the admixture of trust law, criminal law, company law and tort law, are sufficient. The Regulator might be better turned into a branch of the courts, but operating much more quickly and cheaply. Arguing that the Regulator simply does what Parliament tells it to is a cop out.
2 What should I do about trustees?
There is occasional comment that some trustees are not up to snuff. It is almost certainly true. But what is also almost certainly true is that trustee training is better done by commercial providers, or internally by advisers, that bad trustees are not going to be improved by nagging them, and that there are in any area of human activity bad lawyers, bad doctors, bad cricketers and, dare it be said, bad regulators. At least trustees are subject to the law of trusts, which imposes much more personal liability than applies to regulators and their board members, who are predominantly immune from personal liability. It is probably best if trustees were left alone.
3 Consolidation of schemes?
Consolidation seems to be the mantra of the day. In principle, it is clearly inefficient to have thousands of schemes, with the ongoing costs of administration and investment management, and the fees of lawyers, accountants, actuaries, investment consultants, covenant reviewers and other advisers, as well as all the compliance and governance costs. The public sector is moving gradually towards consolidation. The Netherlands has shrunk several thousand schemes into a few hundred, but the Dutch experience has not been a happy one. Anyone who has had to deal with the oligopoly of banks, or accountants, or broadband providers or HM Revenue & Customs (HMRC) knows that the customer experience of dealing with large organisations can be worse than dealing with small ones. Just saying, is all. And in any event, while having fewer schemes to manage sounds good for a regulator, it is hardly its job to interfere with the commercial realities of life. Regulatory mission creep needs its own monitoring.
4 Press management?
Recent press releases from the Financial Conduct Authority (FCA) and the Regulator sound more like those of the incoming President of the United States than the balanced, neutral, professional responses of a quasi-judicial operation. Judges, for example, do not proclaim (in public at least) that they have been upheld by the Court of Appeal; it would be undignified if nothing else. The only exception seems to be that of the Pensions Ombudsman, who will very rarely intervene to explain why it has come to a particular decision in a particular case. So it might be time to retrain the press office and give it an ethical code of practice. And cut it down to one person.
5 Fining and prohibitions?
In theory, penalising people for failure might improve the behaviour of trustees and employers and send a message to others. In our daily lives, for example, we do not want psychopaths wandering our streets. On the other hand, history suggests that sending sheep-stealers to Australia benefited Australia not us, and moral philosophers have shown that imposing penalties usually has a counterproductive outcome, although it looks good at the time to the sans-culottes.
6 Regulatory training?
Most of us in the professional world benefit from, or are compelled, to take training. Training of regulators often involves being trained in the mechanics of the field they are operating in – but less often involves the softer skills, such as dealing with the public or clients or their regulated subjects. Even rarer is training in the philosophy and techniques of regulation, which is a craft sui generis. There are places which run such studies; Henley runs a self-congratulatory MSc for
the FCA, which is not a good example, but there are other sources. If even voluntary trustees need training, a fortiori, as we are no longer allowed to say, so do regulators.
7 Costs and overheads?
It is now costing around £80m a year to run the Regulator. Some of that may come down once auto-enrolment is put to bed, but it is still a great deal, it is hard to prove its cost-effectiveness, it involves over-engineering and it costs the industry very much more in responding. The question is whether reducing the operation, for example, to a third of its size (HMRC has taken a 40% cut in manpower over the last few years) would result in reduced protection. Many of the publications and much of the information gathering are supernumerary and could be dispensed with.
8 Tone and industry relationships?
The Pensions Regulator, like other regulators, tries to do what it says on the tin. But most of us know the Regulator has done and can do very little by way of beneficial enforcement; it concentrates on things it can do, such as box ticking. Over time, its relationships with the industry have fluctuated, but they are not now at their best, and much of the reason is tone (which varies at different managerial levels). The HMRC charter, for example, states that HMRC will regard its taxpayers as innocent until proven guilty, and that it will be proportionate in its dealings with citizens. We all make mistakes and, provided the errors are not malign in intent, a regulator should apply industrial quantities of mercy. Tap on the list of recent press releases from the Regulator and we can see the admonitory tone which simply irritates the law abiding.
9 Transparency and feedback?
Corporates, especially corporates with a monopoly, know that unless they organise proper feedback, they will not survive in their current form. They take soundings, use mystery shoppers and organise user groups. Regulators, with a parallel monopoly, face similar challenges. The current sampling of user experience which informs the board is flawed, since most of it involves people who in practice have little day-to-day strategic involvement. There might be better feedback if there were dinners with trustee chairmen, who might give a very different response than the one the board normally receives following questions which beg the answer.
10 Black letter or common sense?
All regulators, especially junior ones, feel constrained by the rules; they are after all a creature of statute. The Pensions Regulator is also nowadays subject to intense political pressures. It might help if there were guidance, published about how it will respond to such pressures, ignoring political grandstanding by parliamentarians, for example. A professional regulator could empower properly trained junior staff to use their discretion, and more widely employ the practice of raising the governor’s eyebrow, as Matthew Parris calls it. Finally, it would attract sympathy if regulators worked with trustees, rather than berating them for technical breaches, and back away completely if there is nothing in practice for it to do. Nor is there a role for the Regulator in setting investment policy. There is now a great deal of extra trustee governance and paperwork demanded. It is hard to see whether there is any added benefit for members for all that governance.
11 Existentialism: are there better alternatives?
Finally, if the Regulator is to downsize, as most of the rest of government is intent on doing in other areas of activity, does it need to find an alternative role or could it offer different services? Its activity recently in sorting out a drafting error suggests it could perform a quick and easy rectification service very well. There have been two wonderful examples of positive help by the Regulator in the Halcrow and DCT Civil Engineering Staff Pension Fund cases. There should be more of that. However, its legal spend suggests that litigation is not its strong point – and nor should it be. Assisting schemes to resolve their issues by giving safe harbours would be a more useful and cost effective service to the entire industry.
12 More rules?
The government is committed to OITO (one in, three out) in rule making. It may be time to take a scythe to some of the Regulator’s paperwork.
And my apologies to my secret mentor. You were right and I was wrong.
C Parker, The compliance trap: the moral message in responsive regulatory enforcement,  49(3) Law & Society Review 591
David Hume, Essays: Moral, Political and Literary, 1742, cited in Samuel Bowles, The Moral Economy, Yale, University Press, 2016: "Political writers have established it as a maxim, that in contriving any system of government . . . every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interest. By this interest we must govern him, and, by means of it, make him, notwithstanding his insatiable avarice and ambition, cooperate to public good. . . . It is, therefore, a just political maxim, that every man must be supposed a knave: Though at the same time, it appears somewhat strange, that a maxim should be true in politics, which is false in fact."
Deregulation Act 2015
Getting government off your back: our commitment to cutting red tape, speech by Sajid Javid, Secretary of State, Department for Business, Innovation & Skills, 3 March 2016 at BCC annual conference, QEII conference centre, London.
Legislative and Regulatory Reform Act 2006 s21
National Audit Office, Controls on regulation, 28 September 2012
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National Audit Office, Using alternatives to regulation to achieve policy objectives,
30 June 2014
Samuel Bowles, The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens, Yale University Press, 2016
The Regulators’ Code, Department for Business, Innovation & Skills, April 2014