"Things need to change….The trustee model isn't broken but it does need to work better". This statement appears in the foreword to a recent consultation by the Pensions Regulator (TPR) on the future of trusteeship and governance.

TPR sees good governance as the key to ensuring positive outcomes for savers and has outlined three key areas to focus on over the coming years in order to reduce the number of poorly run pension plans. The consultation concentrates on:

  • trustee knowledge and understanding (TKU), skills and ongoing learnings and development
  • scheme governance structures for effective decision-making, and
  • driving consolidation of defined contribution pension plans.

Trustee knowledge and understanding

Under the Pensions Act 2004, trustees have a statutory duty to ensure that they have sufficient knowledge and understanding of pensions and trust law to enable them to perform their role effectively. However, TPR’s research suggests that more needs to be done to raise the standards of trusteeship and governance, particularly in relation to small and micro plans. TPR feels that such plans are often associated with a lower quality of governance and administration, with a recent survey showing that just under a quarter of small plans, and less than a fifth of micro plans, reported meeting the TKU requirements.

As a result, TPR suggests moving away from the current broad TKU syllabus towards setting more competency-based standards in line with those contained in its 21st century trustee campaign. TPR's supervisory approach will increasingly require trustees to evidence how they meet the TKU requirements. As part of this, TPR confirms that it will be more proactive in contacting plans through calls, emails and letters with a view to tackling specific risks.

TPR is also keen to hear views on whether there should be a legislative requirement for trustees to demonstrate a minimum level of TKU, which could involve relevant training or qualifications. It believes that all trustees should be able to demonstrate a minimum level of annual learning through formal continuing professional development-type training, and that more should be expected of professional trustees.

Scheme governance

TPR notes that a 2016 survey by the Pensions and Lifetime Savings Association found that, on average, 83% of trustees are male. Its own research in 2016 found that a third of trustees are over 60 years old, which it feels does not reflect the profile of most savers.

TPR's view is that pension boards benefit from having access to a range of diverse skills, points of view and expertise and it cites evidence that diverse groups are more effective at decision-making. However, it does not go so far as to propose a quota system, recognising the difficulty that smaller plans, with a smaller pool of resources from which to select trustees, would have in meeting such a quota.

Nevertheless, as a public body, TPR has a duty to advance equality of opportunity and to eliminate unlawful discrimination. It therefore questions whether there should be a statutory requirement for pension plans to report on the steps that they are taking to ensure that their boards have the necessary diversity of skills and are reflective of their plan's membership. In addition, TPR asks whether the pensions industry should play a more active role in creating tools, guidance and case studies that can help pension plans to attract more diverse lay trustees.

Between 20% to 30% of pension boards currently employ an accredited professional trustee and TPR thinks that the vast majority of pension plans would benefit from doing this, on the basis that professional trustees possess vital skills, knowledge and expertise. TPR welcomes views on whether legislation should mandate the appointment of a professional trustee on each pension board in the future. While it recognises that it would not currently be feasible for every board to have a professional trustee, TPR expects that this may become possible if the number of pension plans in existence continues to fall and its drive for the consolidation of pension plans has an effect.

TPR has become aware that a number of employers of defined benefit plans are moving towards a sole trustee model, whereby the pension plan only has one trustee which could be an individual or a trustee director (or other individual) acting on behalf of a corporate trustee, for example, on behalf of a professional trustee firm. TPR recognises that there can be benefits from a such an arrangement but is also "alive to the risks" associated with a lack of diversity or saver representation. For now, TPR is seeking views on whether governance standards for sole trustees need to be strengthened.

Consolidation of DC pension plans

Almost three-quarters of trustee boards of micro pension plans and more than half of small pension plans reported in TPR's 2019 survey of defined contribution (DC) plans that they do not meet any of the five key governance requirements applicable to them. TPR is clear in its message that DC plans that are unable, or unwilling, to improve their governance standards must be given the opportunity to wind up.

TPR therefore supports the proposal in the DWP’s recent consultation that pension plans conduct a triennial assessment of whether they should consolidate into a larger plan, although it says that it would be good practice for trustees to consider whether to consolidate on an annual basis as part of their "value for members" assessment.

TPR is of the view that DC consolidation will assist in closing the quality gap and ensure that savers are able to participate in well-run pension plans. It notes that consolidation into a master trust will be the likely route for most plans and it has confidence in the quality of master trusts given the authorisation regime that applies to them.

Next steps

The consultation closes on 24 September 2019. Following this, TPR will consider the responses received and then set out next steps and timings for implementing its proposals. It is clear from the consultation that TPR intends to target poorly governed pension plans in addition to raising the standards of trusteeship and governance across all plans. While a balance needs to be achieved against being overly prescriptive, this should hopefully result in a positive outcome for pension savers.