It is clear from our 21st century trusteeship and governance1 research that the quality of trustee governance and administration is patchy.
Generally, but not exclusively, it is better in DB, and worse in DC schemes. More often it is good, but not always so, in large schemes, less so in smaller ones.
Ten years of our trustee education and enablement strategy seems not to have put better governance on some trustees’ to-do-lists. The result is that too many occupational pension scheme members and sponsors are suffering financial detriment from poor stewardship.
Some apologists for the status quo claim that raising governance standards is just a ‘tick box exercise’ or ‘disproportionate’. But the available research2 shows that good governance can add 1 to 2% investment return each year. That’s not just a ‘nice to have’. In fact, isn’t it bizarre to argue that to forgo the opportunity of that added return is ‘proportionate’?
I am certainly not prepared to accept that we should have two classes of scheme member – those lucky enough to benefit from good governance, and the unfortunates who do not. All members have the right to expect that their retirement savings benefit from effective trusteeship.
Further, poor stewardship impacts the funding costs of DB schemes which translates into poor value for money for scheme sponsors.
In short, poor stewardship is not victimless and I do not think the status quo is acceptable. So, what can you expect The Pensions Regulator to do about it?
To start with, we have focused this year on some basic ‘hygiene factors’. We have been taking a tough line on failures to complete scheme returns and on the completion of the Chair’s statement. There is a simple reason for this – where trustees are unable to comply with even their basic legal duties, it is likely to be symptomatic of more serious stewardship failings, in some cases fraud.
It is also clear from our research that an effective chair of trustees and the presence of professional trustees on boards has a positive effect on stewardship. We want to take steps to embed the good practice we see in these well-run schemes more widely, and we will do this in two ways.
First, we already make it clear that we expect higher standards from professional trustees. We will be going further next year by setting out clearly what we expect of a professional trustee in practice. This will lead not only to clarification of our expectations of professionals, but also to clarity about our likely enforcement action when these standards are not met.
We will also clarify how we define a ‘professional trustee’ so it clear to who these higher standards apply.
Second, we recognise that an effective chair possesses many ‘softer’ skills and we need to be clear about the specific skills and qualities we expect chairs to bring to the board of trustees – for example, leadership, planning the board’s work, negotiation and commercial experience, mentoring of board members – and what sponsors and trustees should look for when recruiting an effective chair.
We will be clear too that we do not underestimate the important role played by lay trustees. Our research shows that the most effective boards have a diversity of skills, points of view and backgrounds to draw upon. So, whilst we will expect the chair and professional trustee to provide a framework for good governance, administration and legal compliance, good lay trustees can bring vital perspective and expertise.
We will continue to encourage and support lay trustees through the development of the Trustee toolkit and by using our trustee data more effectively to segment the trustee universe to target those who appear to need the most guidance and self-help tools.
In addition we will seek to encourage employers to allow lay trustees the time they need for preparation and attendance at board meetings, and the financial support they need to receive effective training. Sponsors need to be educated to see this as a valuable investment to drive value for money from their scheme, not as a financial burden.
But this is not our task alone. Legislators too are recognising that raising the standard of pension scheme stewardship is important. The Pension Schemes Bill will place new higher expectations and responsibilities on the trustees and other key controllers of master trusts, and IORP2 will potentially place higher standards of governance and administration on all trustees.
This should not be a surprise. As pension schemes have evolved in size and complexity since the 1995 and 2004 Pensions Acts, shouldn’t too our expectations of trustees and concept of good stewardship?
Finally, we have a diverse, hugely fragmented and complex occupational pensions schemes market. To address this I believe that some scheme consolidation will be the most sustainable strategy.
For example, I see opportunities to improve the funding position of many DB schemes by reducing the costs associated with governance, record keeping, investment management and professional services through shared structures – some large sponsors with multiple pension schemes do this already.
Further, in the case of the many tens of thousands of DC schemes, their consolidation within authorised master trusts will likely be the best long term solution for their members and the most cost effective outcome for their sponsors.
In fact, I suggest, raising the standards of pension scheme stewardship and scheme consolidation may simply be two ways of expressing the same end – 21st century pension schemes.
By Andrew Warwick-Thompson
2 Ambachtsheer K, Capelle R and Lum H, (2006), Pension Fund Governance Today, Strengths, Weaknesses and Opportunities for Improvement, Financial Analysts Journal, October 2006 (PDF, 149kb, 28 pages).