The Pensions Regulator’s chairman talks smoothing, auto-enrolment and the future of regulation with David Blackman

I’ve a pretty low boredom threshold,” says Michael O’Higgins, reflecting on a thoroughly varied CV.

“The longest I’ve been in a job is 10 years and I’ve changed careers and not just jobs,” he says.

After starting out in academia, the chairman of The Pensions Regulator moved into management consultancy, ending up as a partner at PricewaterhouseCoopers. Then in 2006, he was appointed to his highest profile position as chairman of the Audit Commission. Midway through his second three-year term at the commission in late 2010, he became embroiled in controversy as the coalition government announced its plans to axe the public sector watchdog.

he branded the NAPF’s position as ‘let’s pretend economics’

O’Higgins went public with his concerns about the decision. However, while many of his erstwhile staff were pushing out CVs, the Irish economist had already secured a fresh berth at the helm of TPR, where he began work in early 2011. While at first he kept a low profile, over the past year O’Higgins has made his mark on the pensions world, stoutly arguing against pressure from the CBI and the National Association of Pension Funds to relax the funding framework for pension schemes.

Memorably, he branded the NAPF’s position as ‘let’s pretend economics’ during a video interview with Pensions Insight at the organisation’s annual conference.

When O’Higgins pops into the PI office, George Osborne has just announced plans to smooth the discount rates used to calculate pension scheme funding.

The watchdog’s initial reaction to the chancellor of the exchequer’s statement suggested that the boys in Brighton were not exactly cock-a-hoop about the proposed changes. However, while he sometimes comes across on public platforms as prickly, O’Higgins is in a mellow mood when PI catches up with him.

Stressing that it’s the government’s job to set the policy framework, he says: “I’m very glad that the government has rejected the idea of picking an artificial number. I see that as the economics of ‘let’s pretend’.”


However, he warns that if smoothing is introduced, schemes shouldn’t be allowed to pick and choose the way they measure yields. “The caveat would be that you can’t use smoothing and then move back. If they go with [smoothing] they should stay with it: you can’t go back and forth.”

And while he is sympathetic to companies’ frustrations about volatile scheme funding levels, O’Higgins expresses concern that schemes will switch measures just when yields begin to increase. “You might make the change at the wrong time and people could find themselves paying more.

when you make decisions in response to shortish-term pressures, you find that you’ve made them at the wrong time in the cycle

“My experience is that Murphy’s Law tends to apply and when you make decisions in response to shortish-term pressures, you find that you’ve made them at the wrong time in the cycle.

“But what if the current conditions are not a temporary phenomenon, but a ‘new normal’? I fully accept that if we are in for a long period of low yields and this is going to be the norm for the next half decade or more, that poses signifi cant strain on company schemes.”

we smooth contributions, rather than liabilities

However, he warns trustees that those countries operating smoothing-style regimes allow their schemes much less leeway on recovery plans than the regulator does, with three to five years the norm.

“It’s important to understand that the flexibility to extend contributions is likely to be reduced if we move to a smoothing of liabilities, because you can’t have it at both ends.”

And he reminds schemes that under the regulator’s existing arrangements, they can extend their recovery plans when liabilities shoot up. “We already do this, but we smooth contributions, rather than liabilities.”

Osborne also announced plans to give the regulator a new objective to protect sponsor companies. Aon Hewitt partner Kevin Wesbroom has suggested that the watchdog will need the ‘wisdom of Solomon’ to balance this objective with its existing remits. O’Higgins says that he is “relatively relaxed” about the task, though.

“We’ve always taken account of affordability. The question would be how to implement that and balance it against other objectives.” However while the deficit woes of the DB world consumed attention over the past few weeks, it’s just one of a number of challenges facing the regulator. These include, most notably, the ongoing ramifications of auto-enrolment.

We felt that it would be silly not to experience it ourselves, even though our staging date was later

O’Higgins tells schemes to expect more details in the new year on the regulator’s thinking about defined contribution. In the meantime, he reveals that the regulator has voluntarily brought forward its own auto-enrolment staging date.

“Bill has had a letter from himself,” he jokes. “We felt that it would be silly not to experience it ourselves, even though our staging date was later.”

The early implementation of auto-enrolment has gone well, but he is under no illusions that the real test will come further down the line: “Twelve months from now a large number of companies will be coming, which will be the real challenge,” he says. The biggest problem firms face is ensuring they have enough time to implement the initiative.

Occasionally the watchdog can bite back

He says: “If people think they can do it in eight weeks, they will have some difficulties.” But auto-enrolment isn’t just causing SMEs a headache.

Some of the big public sector employers have, perhaps surprisingly, been caught on the hop too, he notes. “Many didn’t think it applied to them because they had a pension scheme and therefore wasn’t relevant.” Hopefully these public bodies won’t include the Department for Work and Pensions. “I had the pleasure of mentioning to [pensions minister] Steve Webb and the permanent secretary of the DWP that they were one of the first organisations to go through auto-enrolment and ask whether they were ready for it. Occasionally the watchdog can bite back,” he adds with an impish grin.

he is “far from convinced” by arguments that the trustbased model is no longer fit for purpose

Auto-enrolment has also sparked an intense debate about whether pension schemes need to scale up. Are there just too many? O’Higgins says: “There’s around 145,000 pension fund trustees and I’m not sure whether there are 145,000 people out there with the time, inclination and ability to be pension trustees. It’s a complex business.”

“There’s a good case for reducing the number of trustees. If we could even up the quality of trustees, combined with a reduction in the number of trusts, that would be beneficial in the medium to longer term.”

However, he says he is “far from convinced” by arguments that the trustbased model is no longer fit for purpose.


Auto-enrolment has also raised question marks over his own organisation, in particular whether contract and trust-based schemes should all be brought under the wing of a single regulator, rather than being split between the Financial Services Authority and the TPR.

However, O’Higgins says he is content with existing arrangements as long as the two organisations maintain their existing good dialogue. “I’m less concerned about the location of the deck chairs than if there are enough deck chairs being looked after.”

He muses though that the evolution of the pension world could see DB schemes eventually go to the Pension Protection Fund and DC funds regulated by the Financial Conduct Authority.

Keeping boredom at bay won’t be a problem for O’Higgins this year

But again, O’Higgins believes, knowing where to draw the dividing line would be difficult.

“The problem with that is that we also regulate trustees, so if we split it that way we would have different regulators for different types of schemes, which would be a pain for the trustees in those schemes. You can move the pieces round the chess board but however you do it, another question comes up.”

On a personal front, O’Higgins has two new jobs: the chairmanship of the NHS Confederation, the trade body for the health service, and a non-executive directorship with Network Rail. Both roles will involve intense public scrutiny. Meanwhile, the regulator faces an extension of its remit as it prepares to take over the regulation of local government schemes.

Keeping boredom at bay won’t be a problem for O’Higgins this year.