Implementing a risk based approach
to regulation
2. A risk based approach means identifying the greatest
risks to members' benefits, putting in place processes to gather
data that will inform TPR about the prevalence of such risks,
and identifying those schemes where members' benefits are most
at risk. If executed effectively, these processes should then
enable TPR to direct its resources to the areas of greatest risk.[5]
In 2003, our predecessors recommended that Opra and its sponsoring
department, the Department for Work and Pensions, should develop
an approach that uses better information about individual schemes
to categorise them, and enables the regulator to oversee the highest
risk schemes closely and intervene promptly.[6]
3. TPR has identified 18 high level risks to its
statutory objectives, including scheme underfunding.[7]
It uses a combination of risk assessment and the size of a pension
scheme to determine the level of resources that it directs towards
a scheme (Figure 1).[8]
This model means that, while between 150 and 300 schemes receive
a high level of direct attention from TPR, some 81,000 schemes
receive very little.[9]
TPR considers it is focusing on the biggest risks to members'
benefits, and that the large number of small schemes are most
effectively regulated through its education and training activities.
These small schemes still have access to TPR's advice and guidance,
as well as other protections such as the whistleblowing[10]
and notifiable events regimes.[11]
4. The recent events at Northern Rock demonstrate
the continuing scope for companies to fail in ways not previously
foreseen either by themselves or their regulators.[12]
TPR considers that market wide risks, such as a prolonged economic
downturn, would affect all schemes, but there could be scope to
manage the impact on scheme funding, for example, by lengthening
the period over which deficits are reduced. TPR could also help
trustees know what to do and make sure that adequate funding plans
were in place. TPR could not prevent the catastrophic failure
of a single employer, but, were this to happen and the pension
scheme was underfunded, final salary schemes would be supported
by the Pension Protection Fund.[13]Figure
1: Scheme classification model
Note: Active intervention
involves a high level of activity from TPR such as frequent face
to face meetings and regular reviews. Intelligence-based action
involves collecting additional information on particular schemes,
for example from other agencies, to determine whether the overall
risk level merits active intervention. Proactive monitoring covers
scanning of scheme and employer data and other market information.
Minimal scheme specific action is where TPR relies on its education
and support activities.
Source: C&AG's Report, para 3.8, Figure 9
5. The ability of the regulator to identify and analyse
risk, or to determine how to intervene, is largely dependent on
good quality data. In their 2003 report, our predecessors noted
that Opra was unable to collect even basic data, such as the addresses
of trustees.[14] TPR
recognises the importance of gathering data, and does so through
returns made by larger schemes every year and by smaller ones
every few years. It has created a web-based scheme return process,
which automatically checks the credibility of the data, and is
much more efficient than the unwieldy paper-based system it replaced.
Information is held on a central database and allows TPR to carry
out much more sophisticated risk analysis than before.[15]
6. TPR's predecessor, Opra, was established following
the Maxwell Communications Corporation and Mirror Group Newspaper
case of the early 1990s.[16]
The case had involved the use of pension scheme assets to finance
the business operations of companies owned by Robert Maxwell,
and had raised serious concerns about the security of pension
assets and the effectiveness of trustees.[17]
Whilst no regulator would claim that there would never be fraud,
TPR considers that, as a result of the controls and checks now
in place, it would be very difficult for a problem of the size
and magnitude of the Mirror case to happen, or, if it happened,
to remain undetected.[18]
The risk to members' benefits from criminal activity was far lower
than that from a company becoming insolvent.[19]
Implementing TPR's approach
7. TPR regulates two very different types of pension
scheme: final salary and money purchase (Figure 2), each
with different risks.[20]
Final salary schemes tend to be larger than money purchase schemes,
with some 1,400 having more than 1,000 members, compared to just
over 200 money purchase schemes.[21]
However, money purchase schemes are becoming more common and are
forecast to cover more than 50% of all active (ie working and
contributing) members by 2012.[22]
Figure 2:
Characteristics of typical final salary and money purchase pension
schemes
