21st Century Trusteeship and Governance
The Pensions Regulator has been building up an increasingly large body of evidence to suggest that the trustee boards of small pension schemes are much more likely than the trustee boards of large pension schemes to fail to meet the required standards of scheme governance and operation. The Pensions Regulator has issued guidance backed up by legislation in respect of DC schemes and it is now turning its attention to how similar requirements could benefit all trust-based pension schemes.
The Pensions Regulator has published a discussion paper designed to seek views on how this aim could best be achieved while at the same time pointing out the need for higher standards to be met by pension scheme trustee boards. According to the Pensions Regulator’s estimates, these trustee boards manage £1.8 trillion of assets on behalf of 32 million pension scheme members so the stakes are high.
The Pensions Regulator asserts, based on its research findings that many trustee boards struggle to cope with the increasingly complex pension requirements. Clearly this is in no small part due to increasing legislative and regulatory burden, but from a regulatory perspective that is simply more evidence of the failure of some trustee boards to cope.
Any call for higher governance standards in pension schemes must be a good thing and the discussion paper can be seen as a good opportunity to help shape the thinking of the Pensions Regulator as further regulation is being developed.
One controversial suggestion in the paper is that small ‘failing’ schemes might be pressured to wind-up and the assets be consolidated in larger well run schemes.
The discussion paper asks for responses to be sent to the Pensions Regulator by 9 September 2016.
The paper breaks down the key areas the Pensions Regulator wants to address.
The paper champions the importance of trustee boards having a mix of skills and looks at the important role independent trustees can play. The paper asks if there should be some form of professional qualification or registration for such trustees.
The importance of a strong chair of trustees is highlighted and again the Pensions Regulator asks if some form of minimum qualification, experience or membership of a professional body should be required. The paper goes on to ask if the current chair and chair’s statement requirements for DC schemes should be extended to DB schemes.
The paper looks at the trustee knowledge and understanding (TKU) requirements and the ways that the Pensions Regulator tries to help trustees in meeting these requirements, e.g. the trustee toolkit and the extensive written material on the Pensions Regulator’s website. The Pensions Regulator asks how it can help trustees to be aware of, understand and apply the TKU framework which reflects its findings that many trustee boards still fail in this area. The paper asks if making new trustees complete the trustee toolkit in the first six months of being appointed would help in this area and whether trustees should meet minimum qualification requirements. Consideration is then given to whether trustees should be required to keep their knowledge up to date by following a Continuous Professional Development (CPD) framework and if further educational tools might help trustees and their advisers.
Having introduced TKU the paper then looks at how trustee boards can avoid problems with conflicts of interest arising and how to deal with third parties operating on behalf of the trustees and/or advising them.
Finally, the paper looks at schemes that are ‘unwilling or unable to deliver good governance and member outcomes’ and asks if ‘In particular, should small schemes be encouraged or forced to exit the market or to consolidate into larger scale provision?’ The paper asks if market forces or regulation may be the way to achieve this migration of members.
The initial action the Pensions Regulator says it is looking at is more targeted training and education for trustees to help raise standards (which is in line with its statutory objective to promote and improve understanding of the good administration of work-based pension schemes). The paper looks at ways this may be achieved but is clear that good governance and member outcomes are the same for members of all types of scheme. It remains to be seen where this leads in the longer term.
Capita will respond to this paper with a view to ensuring that any change in regulatory direction is both proportionate and to the benefit of scheme members.