On 22 July 2016, the Pensions Regulator (the Regulator) published a discussion paper on 21st Century Trusteeship and Governance. The Regulator has invited the views of trustees and other interested parties on a number of discussion questions which are listed in Annex A of the discussion paper.
Over the past year, the Regulator has opened a dialogue with industry in order to consider what more can be done to help trustees to fulfil their duties, in line with its objective to support and educate trustees of defined contribution (DC) and defined benefit (DB) schemes, and improve the standard and effectiveness of trusteeship and governance.
The findings of its research have already been factored into its education activities, in particular in the development of its guides to support the new DC code. This new discussion paper sets out what the Regulator has learned from its recent engagement and research, and sets out its planned next step of implementing a more targeted communication and education strategy over the next year.
The Regulator has researched a number of key areas to better understand trustees' ability to fulfil governance and administration roles. In particular, the Regulator has had regard to the structures and processes that promote the effective operation of trustee boards, the role of the chair, and the best way to deploy training and support tools to achieve effective trusteeship across schemes of all sizes and benefit structures.
The key themes set out in the discussion paper are as follows:
- Board effectiveness and the importance of diversity
The Regulator's research confirms a trend in the "professionalisation" of trustees, with the proportion of schemes without a professional trustee decreasing in the past five years, due to increased governance and the greater complexity associated with running pension schemes. The Regulator notes that to be effective, trustee boards benefit from a diverse mix of trustees who bring a balance of skills and experiences, which may include both lay and professional trustees. Professional trustees are reported to have a positive effect, due to their knowledge, expertise and impartiality to the trustee board
- The role of the chair
The Regulator acknowledges the key role the chair has in supporting and coordinating the work of scheme trustees and setting the approach to governance and scheme management. The paper outlines options to be considered to ensure effectiveness, including managing and identifying risks and conflicts of interest. Commenting on the requirement for a chair's statement for DC schemes from 6 April 2015, the Regulator questions whether DB schemes could benefit from a similar regime.
- Meeting TKU standards and the role of training and development
The Regulator outlines possible solutions to improve trustees’ skills and knowledge, including a mandatory "pass" in all relevant modules in the trustee toolkit within six months of appointment or a six-month probationary period for new trustees, subject to demonstrating sufficient "Trustee knowledge and understanding (TKU)". The Regulator notes that continuous development is crucial in improving effectiveness, and that a more formal approach, such as the Continuous Professional Development framework, could prove to be effective for trustees. The Regulator also asks for feedback on what further education tools and products it could provide.
- Managing conflicts of interest
The research undertaken by the Regulator outlines the importance of having appropriate procedures in place to manage conflicts of interest. The Regulator believes that conflicts continue to be a challenging area for both lay and professional trustees. Given the significant potential for conflicts and the difficulties schemes experience in dealing with them, the Regulator has raised the question as to what is the best way to prevent adverse impact from conflicts. Suggestions include the use of robust processes for managing or preventing conflicts, or improving the framework within which schemes operate, such as appointment processes.
- Engagement with key governance activities and working with third parties
The Regulator explains that there is a wide range of practices in relation to both the frequency and degree of formality of board interactions and the amount of time spent on various areas of governance. The Regulator notes that having a third party provider or adviser in place does not necessarily guarantee that governance is effective and good outcomes are being delivered for members. It is the responsibility of the trustees and their chair to hold third parties to account and scrutinise performance and outputs to ensure that they are getting a quality service and value for money to ensure that risks are being appropriately managed.
In order to improve engagement and governance with third parties, the Regulator has suggested several options, such as revising the online tool it has developed to help trustees of DC schemes assess themselves against the standards of conduct and practice set out in the new DC code (which came into force on 28 July 2016). The Regulator also refers to its existing integrated risk management guidance for trustees of DB schemes, which is designed to give practical help on what a proportionate and integrated approach to risk management might look like and how trustees can use it as part of their plans for meeting scheme funding objectives.
Over the next year, the Regulator intends to increase its focus on educating and supporting trustees. It aims to ensure that its education and communications are sufficiently clear to help all trustees understand what these standards of trusteeship and governance are and act accordingly.
The Regulator intends to be more targeted in terms of the audiences consulted, format and content of products and the channels of communication used, to produce key overarching pieces of guidance to cover principles or issues common to all schemes, and separate guidance to cover issues which are specific to particular types of schemes.
Author: Sinead SheehanThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.