Why companies should engage on pension scheme governance
A series of recent statements and consultations from the Pensions Regulator, DWP and the Pension Protection Fund (PPF) are placing increasing responsibilities on Trustees of trust-based pension schemes and will make good governance an even more important issue for them. Whilst good governance of pension schemes is primarily aimed at improving the security of member benefits, Companies should engage with the Trustees and advisers on governance issues to ensure that their interests are also considered in any actions taken.
For example, some of these potential changes will strengthen the Trustees’ hand in negotiations with Companies.These include increases in Trustee powers (proposed in the DWP Green Paper and the Conservative manifesto) and more explicit guidance from the Pensions Regulator on demanding higher contributions.
Companies that understand these pressures and have an open dialogue with Trustees on issues such as dividend policy and covenant can shape the Trustees view and actions. This could lead to a preferable outcome for the company in reducing the contributions it pays into the pension scheme and at the very least will help avoid any surprises.
Other changes will have an impact on the Company’s interests, but the Trustees decisions may not be automatically aligned without any input from the Company. For example on member communications and investment strategy (both contained in the DWP Green Paper) the Trustees may make decisions which suit the Company view, but only if it is clearly communicated to them. On many such issues, without Company input, the Trustees could decide on a path that is less beneficial or overly complex.
Good pension scheme governance is beneficial for all stakeholders (including company sponsors) and there are now suggested moves from the PPF to give explicit financial incentives for good governance. Whether this explicit incentive materialises or not, the trend on the governance is clear and now is the time to act to avoid being left behind and ensure the company’s time and money are best spent.