Chris Hughes, member of the Corporate Services team at leading independent consultancy Broadstone
Effective governance is critical to the smooth operations of any defined benefit (DB) pension scheme and having a strong and diverse Trustee board is a key step towards achieving it.
Yet, with a reducing pool of candidates, it can be challenging to attract candidates from outside senior management positions and incorporate some of the Regulator’s ideas such as fixed term appointments to bring in fresh perspectives at regular intervals.
But why is this so important?
An effective Trustee board is essential for a variety of reasons.
Firstly, Trustee boards are ultimately responsible for the outcomes that members receive. If the board doesn’t, or is unable to, carry out its function properly or skips important steps when it comes to investments and organisation, it can impact on scheme funding and put the pension payments of its members at risk.
Securing member benefits through an insurance transaction is a common ultimate objective for many schemes – it is important that Trustees have the necessary skills and knowledge to establish objectives and work through this process to make the scheme as attractive as possible to an insurer when funding levels are appropriate. This is particularly important given the intensely competitive de-risking market we are currently seeing.
As cyber threats become an increasing risk to schemes and member data there is also a growing responsibility to make sure Trustees are protecting the scheme as well as possible.
Meeting ESG targets as well as the implementation of Consumer Duty are further commitments every scheme needs to fulfil for its members. Furthermore, the governance requirements for pension scheme trustees continue to increase with the intended introduction of the Pensions Regulator’s General Code and increasing disclosure requirements for DC schemes.
Given the array of responsibilities and emerging pressures it is evident why Trustee governance is so pivotal for both DB and DC schemes.
Yet with decreasing numbers of members volunteering to act as member-nominated trustees there are challenges to getting the right board in place.
That is why we are seeing more companies taking a proactive role to get the right people in the right roles as they review the governance of their scheme’s trustee boards.
For many this involves looking towards corporate advisers – as a first step – to help them appoint a professional independent trustee.
Corporate advisers can also help employers assess various changes, from appointing a sole corporate trustee to manage the existing scheme to moving to an external mastertrust. The pros and cons of these approaches vary depending on the particular situation of the company and its pension scheme.
Similarly, working within the scheme’s existing structure, it can be possible to attract new trustee candidates through greater engagement with the membership and consideration of the Pensions Regulator’s guidance around equality, diversity and inclusion (EDI). As ever, good and regular communication is key to helping members appreciate the work that goes on behind the scenes and how the trustees support the scheme membership.
However it is achieved, it is clear that companies are taking a more prominent role in the make up of their scheme’s trustee board – and that is a good thing as they look to protect member’s interests and manage their company’s pensions risk.