'Good governance matters' is the overarching statement coming from The Pensions Regulator ('TPR') who has recently stressed the need for a drive up in standards of governance as part of their '21st Century Trusteeship and Governance' initiative.
Consultation has been ongoing within the wider pensions industry about how the standards of trustee competence, governance and administration of pension schemes can be raised. It comes on the back of research which suggested that the quality of governance and administration under the current regime is 'patchy', with many schemes falling short of the standard that is currently expected. Enforcement action taken by TPR was described as lacklustre.
TPR have stated that 'it is unacceptable that some members are at a greater risk of poor outcomes in later life purely because they happen to have been employed by an employer with a poorly run pension scheme'.
Strip back and clarify
TPR's initiative does not involve imposing an entirely new set of standards for governance and administration 'reinventing the wheel', instead it is taking a 'back to basics' approach. The aim is to simplify and clarify areas of the current regime, which many have felt are too voluminous and lack accessibility.
As part of the initiative, TPR is proposing three ways in which to achieve its aims:
- Targeted education and tools;
- Clear, practical definitions and realistic expectations for 'higher standards', professional trustees and board chairs;
- Tougher and broader use of existing enforcement powers.
The ambition is for real work to be done very quickly in those schemes, and by those trustees, who have so far failed to meet the current regime's standard - the initiative has a distinct air of 'cracking the whip'.
TPR undoubtedly has an important role to play in supporting trustee boards to be as effective as possible. That said, it is their intention to consolidate, simplify and reduce much of the existing guidance that is currently available, particularly in terms of website content. This, it is hoped, will help to reduce the time required to source information, and will ultimately make information more accessible.
TPR aims to put words into practice by publishing 'extensive guidance' on a number of common areas which affect all pension schemes and build upon and streamline much of what is already in existence.
To work 'efficiently' TPR intends to use the data it collects more decisively. Efforts, resources and signposting will be actively targeted to those schemes and trustees who need it most. TPR have acknowledged the burden placed on the industry when guidance is generalised, so it is hoped that in targeting specific schemes who fall short, compliant schemes are recognised and are given the freedom to 'continue as normal'.
As well as educating and targeting certain schemes, TPR intends to get more proactive on enforcement. Those trustees and schemes who are either unable or unwilling to meet redefined practical standards can expect to come under scrutiny and for TPR to act swiftly to enforce good governance.
They are getting tough(er); having 'already fined trustees for failing to complete the scheme return and for failing to prepare a chair statement'. This, some will argue, shows a real shift from rhetoric, to actual and genuine enforcement and wider-intense use of the powers available to them by investigating more closely the trustees who fail to meet expectations around competence and governance.
Not only are TPR expecting to use their powers more broadly, but they intend to increase the publicity of when those powers are being administered. Part of this decision can be seen as TPR wanting to be seen to be exercising their powers, but part can also be seen as 'educating' and providing a useful guidance to other trustees and managers so as to prevent falling foul of the same action. This will help to improve TPR's transparency.
The publicised actions will be done via Intervention Reports under s89 of the Pensions Act 2004.
Another part of the initial discussions was around the idea that professional trustees ought to have mandatory minimum levels of qualification before fulfilling their role on the board.
While the idea was welcomed by a few, the majority (including TPR) agreed that 'minimum qualifications' would not be an adequate test and measure of the broad range of experience, skills, knowledge and attitudes required of a trustee on an ongoing basis.
TPR agrees that minimum qualifications are unlikely to address failures to comply with governance and competence expectations, and is unlikely to encourage increased diversity on the board. Accordingly TPR has stated it will consider a 'fit and proper test' for trustees at a later time once it has clarified its expectations.
It is clear that TPR is getting tough on schemes who are not meeting pension scheme governance and administration standards. While the response included no vastly-radical changes or ideas, trustees should note that ongoing failures to meet minimum standards can and will result in publicised enforcement actions.
For now, no further details of TPR's plans have been released, other than confirmation they expect to be in implementation mode around Spring 2017. With this in mind, scheme trustees should be considering now and throughout 2017 reviewing and updating their scheme governance skills and processes. All steps taken should be well thought out and tested for robustness and proportionality with the support and guidance where needed of the trustees' legal, actuarial, administration and investment advisers.