The drive by the Pensions Regulator (TPR) to “raise the bar” as regards governance standards in trust-based workplace pension schemes has taken a further step forward with the recent publication of a discussion paper entitled “21st Century Trusteeship and Governance”.

The paper sets out various key concerns in relation to both DB and DC schemes, including quality assurance within the professional trustee market, improving levels of trustee training and competence, management of conflicts and increasing the engagement of trustee boards with advisers and service providers. Although the paper stops short of making any concrete proposals for change, possible solutions – a few of which would represent fairly radical departures from the status quo – are put forward for comment.

Background

The discussion paper marks the next step in TPR’s ongoing review of current standards of governance in trust-based schemes, which started in 2015 and has to date involved both quantitative and qualitative research. Specifically, the paper builds on the results of TPR’s 2015 survey of over 800 in-depth interviews of trustees of DB, DC and hybrid schemes.

Views are particularly invited from trustees of occupational pension schemes (whether DB or DC, and whether professional or lay), as well as from other interested parties. The closing date for responses is 9 September 2016.

The “key themes” which TPR has identified from its investigations and research to date are:

Trustee board effectiveness and the importance of diversity.

TPR notes and appears to welcome the increasing use of professional trustees, with research showing a positive correlation between the “professionalisation” of trustee boards and higher governance standards. However, TPR also flags a concern that there are no barriers to entry to the professional trustee market, and asks whether all professional trustees should be required to be qualified or registered with a professional body.

The position of the chair of trustees is also considered, with TPR considering this to be a “crucial” role in supporting, co-ordinating and leading the trustee board. Again, the question is posed as to whether chairs should be required to meet a minimum standard of qualification or experience or be a member of a professional body. It also suggests that DB pension schemes (like DC schemes) should be required to appoint a chair and produce an annual governance statement.

Meeting TKU standards and the role of training and development

TPR clearly has some key concerns in this area, no doubt driven in part by the research findings which indicated real gaps in trustee knowledge and understanding (TKU).Almost one in five trustee boards either did not know about TPR’s code of practice on TKU or were unable to confirm whether all their non-professional trustees were compliant with TPR’s standards.

The paper floats various possible approaches to address this issue, including:

  • compulsory completion of the trustee tool-kit within the first six months of appointment
  • a six-month “probationary period” for new trustees, which must be satisfactorily completed before the appointment is confirmed
  • a requirement for all trustees to possess (or obtain) minimum qualifications, and/or
  • instituting a continuing professional development (CPD) framework for all trustees (to ensure that knowledge is kept up to date).

Since time pressures are cited as a barrier to achieving TKU standards, TPR indicates that it is looking to produce more tailored and focussed trustee education materials, to complement existing more comprehensive codes and guidance. There is also the suggestion that TPR will take some of the generic content in its recently prepared “how to” guides for DC schemes and use it to create overarching guidance covering areas of governance common to all DB and DC schemes (and public sector pension schemes).

Managing conflicts of interest

No really new issues or solutions are presented in this section of the paper, but it is clear that this remains an area of concern for TPR, particularly in relation to smaller DC schemes. The paper seeks suggestions on ways in which schemes can prevent or manage conflicts. Interestingly, research findings show that the employer is materially involved in the appointment process of over half of trustee chairs, and one in ten MNTs. The fact that TPR is highlighting these findings suggests that TPR may view this fact, in itself, as giving rise to a risk of conflict.

Engagement with key governance activities and working with third parties

The findings of TPR’s research are featured particularly prominently in this section of the paper. There are some startling statistics – for instance, 7% of trustee boards meet less than annually or have never met; trustees of 50% of DC schemes spend less than 5 days per year on trustee duties and one in ten schemes cannot afford to appoint advisers. Unsurprisingly, TPR describes such findings as showing a “worrying” lack of engagement by such trustees with the governance and administration of their scheme.

TPR intends to provide additional guidance and tools to assist trustees in improving their engagement with the investment and administration of their schemes, but also warns trustees to expect enforcement action if key governance duties, such as the preparation of the chair’s statement or annual return, are not complied with in a timely fashion.

Small schemes

TPR’s research clearly shows a correlation between size of scheme and standards of governance, with smaller schemes (and particularly DC-only schemes) being generally associated with a lower quality of governance and administration. The question is posed as to whether small schemes should be encouraged or (more radically) forced to exit the market or to consolidate into larger scale provision in order to address these concerns.

Comment

It is clear from the document that this is not a full-blown consultation paper. At this stage TPR is simply inviting views on how the areas of concern which it has identified could best be addressed (whether by TPR itself or by other means).

Nevertheless, in those cases where possible solutions are presented for consideration, the paper provides valuable insight into the direction of TPR’s thinking. It is tempting to infer from the paper that TPR’s ideal outcome would be a smaller number of much larger schemes which are better able to afford the services of professional trustees (who would in turn drive improvements in governance). As an added bonus, such a reduced cohort of schemes would also make TPR’s job of oversight and scrutiny of occupational pension schemes rather more manageable.