The Pensions Regulator has issued for consultation updated draft versions of its code of practice and scope guidance on trustee knowledge and understanding (TKU). The consultation closes on 31 December. Wragge & Co has been working with the Regulator regarding its proposals for change to the scope guidance. We were also involved when the Regulator launched its trustee toolkit e-learning programme.

Trustees will need to make sure that their training arrangements comply with the new code and guidance once finalised. The Regulator confirms that the TKU regime will continue to apply to each individual on the trustee board, and not to the board as a whole (as recommended in last year's deregulatory review report commissioned by the Department for Work and Pensions (DWP)).

Why is the Regulator consulting on this?

Scheme governance is in the spotlight. The Pensions Act 2004 requires trustees to have knowledge and understanding of the law relating to pensions and trusts and the principles relating to scheme funding and investments. Trustees must also be conversant with key scheme documents (including the trust deed and rules, the statement of investment principles and the statement of funding principles). The Regulator says that the changes are needed because of the changing pensions landscape, and reflect its increased interest in:

  • schemes in wind-up (in particular, awareness of sensible preparatory steps),
  • buy-ins and buy-outs (and related issues such as abandonment and inducement),
  • administration (with increased emphasis on the importance of good administration),
  • the employer covenant for defined benefit schemes (its importance and the trustees' understanding of their powers) and
  • Personal Accounts (due to be introduced in 2012).

Other publications by the Regulator have revealed that these areas are very much on its radar, so it makes sense for this to be reflected in its expectations surrounding TKU.

The pensions industry had been expecting the Regulator to revisit TKU around this time since the Regulator had said, when introducing the requirements in 2006, that it would revisit TKU after the first couple of years. 

Small defined contribution schemes have also come in for attention, with new guidance (albeit on a reduced scale) proposed for fully insured DC schemes with 12-99 members.

What should trustees do? 

Although the final code and guidance won't be available until sometime in 2009, the drafts are likely to give a good idea of what we will end up with. The draft code refers to the Regulator being able to check the TKU position when in contact with a scheme on any regulatory issue, so the Regulator is clearly taking this seriously. For those trustee boards who have taken TKU seriously there should not be much to fear.

It's worth noting that those trustees who have already completed the trustee toolkit e-learning programme developed by the Regulator will not have to do the programme again (the Regulator gives an express assurance on this).

Once we have the final code and guidance wording it would make sense to compare existing training arrangements against the new requirements and carry out a training needs analysis. The National Association of Pensions Fund (NAPF) is currently working on a self-assessment toolkit that will include training needs (it is hoped this will be available by Christmas). The code has always recognised that some large schemes already run annual discussions between the chair and each person on the trustee board to identify learning activities that could be useful to that individual over the coming months. The code recommends that trustees review their own TKU at least annually against the guidance.

The Regulator also suggests that trustees might consider insisting that people providing their training should be able to certify that those attending have participated actively and demonstrated that they have understood the materials. The trainer will therefore play a key role in the paper trail when proving that trustees have met the TKU requirements. Of course it is not always easy for everyone attending a seminar to participate actively and demonstrate their understanding, so the trainer will have to employ tactics designed to enable delegates to do just that and we may see some changes in the format of trustee training.

The chair has a special role (the draft scope guidance includes a requirement for trustees to have a working knowledge of, among other things, job descriptions for the chair and the other trustees). The code already identifies the chair of the board (and the chair of any investment sub-committee) as being the person to whom others on the board will look for guidance. As well as playing a central role when checking existing arrangements and individual training needs against the new code and guidance, it seems likely that the chair will also be the person looking at whether trainers will be in a position to provide the kind of certification that the Regulator will be looking for. At Wragge & Co we have been encouraging chairmen of trustees to lead the way in governance matters, as they do in the corporate environment, for some time and this is further confirmation that this is also how the Regulator sees the position.