The prime minister and the chancellor have ordered arm’s length bodies to make savings of at least £800m from April in a “crackdown on cross-Whitehall waste”, as part of a wider £5.5bn cuts programme. What will it mean for pensions bodies? 

 

Ahead of this week’s Spring Statement, prime minister Boris Johnson and chancellor Rishi Sunak have said they want to eliminate “waste to drive efficiency, effectiveness, and economy across government”. A new 'Efficiency and Value for Money Committee' - chaired by Sunak himself - will cut £5.5bn, the bulk from the Department of Health and Social Care.  

 

As part of the savings drive, 'quangos', including arm’s length bodies, will be expected to be cut back by least £800m. The amounts saved would flow back into public services, the Treasury has said. 

 

The Treasury has declined to name the organisations affected at this point, saying only that an upcoming Arm’s Length Body Review in April will have more details about who is in scope for the cuts. 

The announcement stated that arm’s length body savings would come “from better use of property, reduced reliance on consultants, increased digitisation and greater use of shared services, as well as the use of benchmarking”. 

 

In 2019, the Cabinet Office counted 295 arm’s length bodies, which in 2018-19 had gross resource expenditure of £265bn and employed almost 300,000 full-time equivalent staff. Last June, the National Audit Office looked at the central oversight of arm’s length bodies, finding that that “the continuing inconsistency in how ALBs are set up and overseen is a barrier to further improvement”. 

 

The pensions sector has a number of government bodies – regulators mainly, but also ombudsmen, redress services and the Money and Pensions Service. What could this latest announcement mean for them? 

 

 

Such sweeping announcements of intentions to reduce ‘waste’ are nothing new, it seems. Former pensions minister Sir Steve Webb, now a partner at consultancy LCP, said calls for efficiency savings were “a ’hardy perennial’ of the Budget season”.  

 

But balancing the books through such savings means taking risks. “Whilst there is obviously always scope for greater efficiency, cuts on this scale generally mean significant staffing reductions and resultant reductions in public services,” he said, arguing that the quality or scope of public service was directly linked to staff cuts. 

 

While he agreed that arm’s length bodies should be included in any cuts exercise, Sir Steve said that regulators and other bodies have had to implement and enforce a growing amount of legislation, warning that if they are faced with budget cuts, they might not be able to deliver on requirements like those in the Pension Schemes Act 2021.  

 

“If politicians are willing to be specific about which current activities are low priority and can be stopped, then savings can be made, but parliament has a tendency to load more and more responsibility onto regulators and other bodies without always allocating the resources needed to deliver those new duties,” he said. 

 

 

Efficiency could not just mean cuts but also reorganisation. Baroness Ros Altmann, another former pensions minister, sees efficiencies coming mainly from reducing fragmentation in the system: “If one wants some efficiencies, I do think it is long overdue that the Pensions Regulator takes over all responsibility for pensions, which would allow some streamlining of the FCA functions.” 

 

She said the same should be considered for the ombudsman services, where different ombudsmen deal with different issues within pensions. Similarly, she wants to see fewer bodies involved in scam prevention. “There is huge opportunity to streamline all the bodies charged with trying to protect against scams too,” she said. 

 

 

Arm’s length bodies are always under pressure to keep costs to the public purse low, said Margaret Snowdon, president of the Pensions Administration Standards Association, who was also a non-executive director of TPR until 2020. 

 

“Cutting costs to the public purse is in principle a good thing, as long as it is focused on 'eliminating waste' or 'increasing efficiency' and not just reducing expenditure for the sake of it,” said Snowdon. “Too often, we cut costs before we invest in the efficiency we need - this leads to missed opportunities and worse, missed threats,” she warned.  

 

In future, the government and regulators will expect the industry to do more itself to deal with challenges, she said: “This could be a win if those who do the right things could be left alone to get on with it and the focus of intervention could be targeted only at those who do not.” 

 

Some in the industry would be happy to see less of the regulator and more of the industry. Robin Ellison, a partner in law firm Pinsent Masons, said TPR’s budget has increased. The regulator’s latest annual report shows its budget was £105.3m for 2021-22, up from actual expenditure of £74.8m five years earlier, when its remit was smaller. 

 

The cost to pension funds and employers of complying with regulations was many times that, Ellison added, calling for value for money assessments for these costs. "A genuine value-for-money exercise could save UK industry around £1bn a year or more if properly conducted,” he claimed. 

 

The temptation for regulators is to save costs by pushing their transparent costs onto the regulated bodies, which does not actually achieve the savings, he said; instead, “TPR should announce it is reducing its budget by 90% and moving into smart or intelligent regulation." Smart regulation, a term coined in the late 1990s, proposes a system reliant on self-regulation and co-regulation, using business interests and non-governmental organisations as regulatory surrogates, alongside traditional forms of regulation.  

 

To ensure value for money within regulators, Ellison said the Pensions and Lifetime Savings Association, the Pensions Management Institute and other bodies “should offer to act as kinds of governance committees for regulators and bear down on value for money, using similar criteria as used for pension funds and insurers, but using external and independent monitors". 

 

 

The bulk of the regulator’s funding is financed through levies, observed Ian Neale, director of pensions technical specialists Aries Insight. This means the chancellor’s ‘efficiency drive’ would have little or no impact on pensions bodies for their current duties, he note 

 

Neale – who pointed out that the government’s use of resources during the pandemic is by many considered wasteful – also noted that the Treasury’s announcement seems to be a relaunch of the Cabinet Office Declaration on Government Reform from June 2021. “Bonfires of this nature are regularly announced by governments under pressure to relieve the tax burden they have imposed,” he said. 

 

Quangos will have varying amounts of ‘fat’ in their budget. While some “operate on the edge of viability”, others spend a great deal of money on consultants and “will be very much in the frame”, Neale predicted. 

  

Of those in the pensions space, industry levies provide the lion’s share of their running costs. “While the sustainability of this funding model is questionable, the scope for savings of taxpayers’ money is very limited indeed,” said Neale, though he noted there could still be scope for efficiency savings and levy reductions. 

  

His concern is less about cuts to current services than about withheld funding for future improvements. “A government looking for savings is likely to look askance at suggestions for new spending, which means that initiatives which cannot be funded by raising further levies on the industry are unlikely to germinate,” he said; ambitions to reduce financial exclusion and improve financial education, or the possibility of a new pensions commission, might fall victim to such spending efficiencies. 

  

Of the public bodies in the pensions space, most declined to say what they expect the Treasury’s plans are. 

A TPR spokesperson said as a public body, TPR is duty bound to operate efficiently and transparently to deliver value to pension savers and to drive efficiency throughout its organisation. 

"We are taking a bold and innovative approach to deliver our Corporate Strategy priorities while also meeting the government’s spending review expectations. At a time when there is a lot of change in regulation, we are working strategically and operationally with other regulators to reduce the burden as far as we are able, while introducing hybrid working for staff as we review our office space. We will work constructively with government on the upcoming Arm’s Length Bodies Review," the spokesperson added.

The Pension Protection Fund pointed out that it is largely funded through levies. A PPF spokesperson said: “We are principally industry, rather than taxpayer funded and only a small fraction of our total operating costs come from government. We are constantly looking for efficiencies, and delivering value for money is one of our current strategic priorities. We regularly report the actions we’re taking and progress against this goal and will continue to do so.”