On 22 July 2016, the Pensions Regulator published its 21st Century Trusteeship and Governance discussion paper. The Regulator is acutely aware that boards of occupational pension plans carry out a very important and difficult role. Trusteeship is voluntary and, in aggregate, trustees are responsible for managing £1.8 trillion of assets on behalf of 32 million members and their role is becoming increasingly challenging in the face of fast-paced changes and growing complexity.

The Regulator acknowledges that although some pension plans have good governance in place, not all trustee boards are meeting the expected standards. For example, although almost 50% of trustee boards surveyed meet at least quarterly, 7% of boards meet less frequently than annually or have never met. The paper continues the debate on what the Regulator (and the wider pensions industry) can do to better support trustees, drive up trusteeship standards and improve governance.

The Regulator carried out over 800 in-depth interviews with trustees from defined benefit (DB), defined contribution (DC) and hybrid pension plans with at least 12 members. In addition, the Regulator observed trustee boards and entered into discussions with key industry stakeholders, trustees and industry experts.

From its research, the paper outlines key findings and challenges. The Regulator has asked for input from the pensions community by 9 September, on a number of key questions to help mould its future regulatory policy decisions, including:

  • Should there be any barriers to entry for professional trustees, i.e. should all professional trustees be required to be qualified or registered by a professional body?

The research highlights the fact that pension plans with only professional trustees are more likely to have better governance arrangements and that professional trustees can improve the effectiveness of trustee boards, bringing knowledge and expertise, commitment and impartiality. Interestingly, the data suggested a trend in the ‘professionalisation’ of trustees, with the proportion of pension plans without a professional trustee decreasing in the last 5 years.

Unlike lay trustees, professional trustees are remunerated or hold themselves out as experts and so higher standards are expected from them. However, there is currently no barrier to entry into the market – anyone can become a professional trustee and unlike other professions, there is also no independent body regulating standards. Although many offer significant benefit to trustee boards and pension plan governance, the Regulator notes that it has also come across a few who are clearly unfit for the role. The Regulator seeks industry views over whether greater scrutiny and safeguarding is required.

  • How can the Regulator ensure that trustees are aware of, understand and are able to apply the Trustee Knowledge and Understanding (TKU) framework?

Over 50% of all pension plans surveyed and 73% of small plans had not documented or formally assessed trustees’ learning needs in the last year. Concerningly, trustees of 1 in 5 pension plans were either not familiar with the TKU code or did not know whether their non-professional trustees had the level of TKU necessary to meet the code standards.

Possible solutions offered by the Regulator include making it mandatory for trustees to complete and pass the Trustee toolkit within 6 months of being appointed. Alternatively, a 6 month probationary period could be introduced for new trustees, with the appointment being formalised once the trustee has demonstrated they have sufficient TKU. The Regulator also seeks views over whether a more formal approach, such as a Continuous Professional Development framework could help ensure that training governance is better embedded in trustee boards.

It will be interesting to see how the pensions industry responds to this discussion paper. Whilst a drive to improve standards is to be welcomed, we would caution against introducing onerous requirements that would serve to discourage lay trustees from putting themselves forward for selection.

If you would like to discuss the Regulator’s paper, please get in touch with your usual Squire Patton Boggs contact.