16th Jul 2020

The future of trusteeship and governance

Share this blog post

The Pensions Regulator (TPR) takes a particular interest in the performance of pension schemes’ governance structures and their ability to ensure good outcomes for members. TPR is frequently critical of overall standards, including those of trusteeship, and in particular what it sees as the unacceptably poor performance of many smaller schemes with limited resources. Its research has apparently revealed that only 4% of micro schemes (between 2 and 11 members) and 1% of small schemes (between 12 and 99 members) meet all its governance standards.

There was a time when allowances were made for the fact that such schemes were not able or willing to keep pace with their larger contemporaries’ spending on steadily increasing prescriptive governance requirements. Now, however, with the arrival of automatic enrolment and the increased reliance on defined contribution (DC) arrangements the mood has changed. Focus has shifted to the member’s perspective, arguing that the quality of outcome should not be determined by the size of the scheme that the member happens to find themselves in. This approach is also driving TPR’s pressure on smaller schemes to consolidate.

Consultation

In July 2019 TPR conducted a consultation on these issues under the heading “Future of trusteeship and governance”. A summary of the responses has now been published, along with TPR’s intended actions to address the issues it regards as needing attention.[1] The document provides useful advance notice to schemes on an important area of TPR’s future focus and to how schemes may have to change in response over the next few years.

The consultation covered 3 distinct but interrelated categories:

  • Trustee knowledge and understanding (TKU), skills and ongoing learning
  • Scheme governance structures for effective decision-making
  • Driving DC consolidation.

TPR has now analysed the responses to the consultation and taken account of those messages in developing their plans for changes to boost required standards of governance and trusteeship. Key proposals are set out below.

Consultation outcomes #1 – trustee knowledge, understanding, skills and learning

The trustee knowledge and understanding (TKU) requirements will be updated with the publication of a new Code. This will form part of a wider project to replace the existing 15 Codes of Practice with one new consolidated and updated web-based Code. The first draft was planned during the first half of 2020 with the new TKU content expected to be available for consultation in early 2021. However, these have now been put on hold due to the need to concentrate resources on coping with Covid-19 issues.

Updating TKU is necessary to reflect the considerable changes in legislation and the risks facing schemes that have occurred in the 15 years since the Code was first published. There will be a greater clarity around what is expected as a baseline level of competence from particular trustees, reflecting the differences in skill levels expected from lay trustees, chairs and professional trustees.

Once the new TKU content and guidance is in place and a reasonable period has been given for schemes to adjust, TPR will conduct a regulatory initiative into compliance levels. This will involve them contacting a large number of schemes to review their compliance and requiring corrective action. Trustees will need to be able to demonstrate compliance, and TPR will be clarifying methods that it will deem acceptable. One proposal is a requirement for ongoing learning, to ensure that trustees’ knowledge is kept up to date. This will include the setting of indicative numbers of hours and types of activities that would satisfy TPR expectations. For professional trustees this would mean a continuation of the current industry-based standard of at least 25 hours’ learning per year. For lay trustees a new requirement of at least 15 hours’ learning per year is envisaged.

To assist trustees with their learning needs, TPR is intending to update the Trustee toolkit when resources are freed up, including relating the content more clearly to practical steps that trustees need to take in running their schemes. There will also be a targeted campaign to remind employers of their legal duties to allow trustees paid time off to perform their role, which includes training.

Consultation outcomes #2 – governance structures for effective decision-making

Diversity is a subject currently receiving a lot of attention, and TPR is keen to drive greater diversity on trustee boards, based upon evidence that more diverse groups make better decisions. Rather than imposing new requirements on schemes at the moment, TPR will instead create an industry working group to bring together existing material and experience. The group will initially be chaired by TPR and will define what is meant by diversity and inclusion in this context. The group will then produce good and best practice guidance, and develop tools and materials to help schemes. It will also be charged with engaging with employers to recognise the benefits of the trustee role in personal development of employees.

Another subject that has been much discussed recently is compulsory professional trustees for all schemes. TPR recognises the difficulties of requiring this and have decided not to introduce it for the moment while making clear that they may return to the idea in future.

Likewise, TPR does not intend currently to change the way it regulates schemes that have a sole trustee. However, there is concern around how effective some of the sole trustee models are at dealing with conflicts of interest and ensuring saver engagement. Consequently it will commission research on the current scale and reach of sole trusteeship. If that identifies problem issues, new regulation may follow.

Consultation outcomes #3 – driving DC consolidation

TPR’s research has identified that a significant number of smaller DC schemes hold benefits for members that contain an element of guarantee, such as a with-profits policy or a protected level of tax-free cash. Guarantees potentially frustrate the drive to force smaller DC schemes to consolidate because where the scheme contains a guarantee or promise in respect of a member’s benefit the member’s specific consent is needed in order to transfer that benefit to another arrangement – affected schemes cannot simply force a bulk transfer of assets.

Following the consultation TPR will now consider further the viability of options such as assignment of policies to individual members or to other schemes, without affecting the guarantee. In due course they may consider legislation forcing NEST to take them instead. What is clear however is that TPR is not prepared to accept this issue derailing their DC scheme consolidation agenda, whilst also reassuring schemes that the agenda is not to force well-run schemes to consolidate against their will if there is no adverse impact upon members from remaining independent. To help trustees and Independent Governance Committees assess whether their scheme provides good value for members, TPR and the Financial Conduct Authority are working on guidance.

Required responses

Although there are no new specific regulatory requirements arising directly from this exercise, it is clear that new initiatives are on their way which will involve tighter regulation of schemes, and in particular trustees. Those potentially affected should begin to give some thought to how they should react.

One positive message to take away is that TPR recognises that there are shortcomings in its own information and training material that need to be addressed before new more stringent knowledge and training obligations are phased in. Also welcome are the pragmatic approaches to some of the more extreme proposals such as compulsory professional trustees for all schemes and a blanket ban on sole trusteeships.

Nevertheless the direction of travel for TPR policies on trusteeship and governance is clear. Meanwhile, even before the new proposals are implemented TPR will continue to look closely at the performance of individual schemes and demand action from those found wanting.

[1] https://www.thepensionsregulator.gov.uk/-/media/thepensionsregulator/files/import/pdf/future-trusteeship-governance-consultation-response-february-2020.ashx