The Pensions Regulator (“TPR”) has published a consultation document setting out its proposals to improve the quality of governance in occupational pension schemes.
TPR notes that its annual surveys of schemes reveal that smaller defined benefit (DB) and defined contribution (DC) schemes are less likely to meet the governance standards that TPR expects. A thematic review of Chairs’ statements (for DC schemes) in 2017-18 established also that the majority of the schemes reviewed had not complied with TPR’s code of practice and guidance when assessing value for money for members.
In Autumn 2018 TPR launched a system of one-to-one supervision for 25 of the biggest DC, DB and public service pension schemes. Where concerns are not properly addressed, schemes and sponsoring employers can expect an escalation in TPR’s approach and more intense regulatory activity.
Over the next two years plans regulatory initiatives to cover:
- investment governance,
- record-keeping,
- prompt and accurate financial transactions,
- costs and charges,
- trustee knowledge and understanding and
- public service scheme administration.
Trustee Knowledge and Understanding (TKU)
TPR’s research revealed that trustees of smaller schemes are less likely to meet the statutory TKU requirements. TPR plans to review the TKU code and scoping guidance, as well as revising its codes of practice to help trustees meet the new requirement to establish and operate an effective system of governance.
This may involve a shift from the current broad TKU syllabus towards setting competency-based standards reflective of those covered in the 21st century trusteeship campaign. TPR’s proposed supervisory approach will involve proactive contact with more schemes through calls, emails and letters, to ascertain how trustees meet the TKU requirements. It believes also that all trustees should be able to demonstrate participation in ongoing learning. However, TPR will continue to expect higher standards from professional trustees.
TPR intends to adopt a different style of communication with small and micro schemes – clarifying priorities and providing simple steps for achieving good governance, noting that trustees of these schemes are more likely to be lay trustees and to rely on external advisers. Nevertheless, TPR will encourage consolidation in schemes where trustees are persistently unable or unwilling to meet the standards it expects.
Make-up of the trustee board
TPR is keen to encourage diversity on trustee boards and is seeking the industry’s views on how to achieve this. It is pursuing also the idea that every trustee board should include a professional trustee. The industry has concerns that there are not enough professional trustees at present to achieve this but TPR believes that, given its push towards consolidation of smaller schemes, there should be sufficient capacity within five years.
TPR is concerned also about sole trustees, identifying the potential issues as:
- employers appointing sole trustees with a view to negotiating an employer-friendly funding agreement,
- a lack of robust decision-making which could be achieved with a diversity of views and
- the loss of member representation.
TPR notes, however, that the Professional Trustee Standards Working Group’s standards for professional trustees, and the accreditation framework that will accompany them, may help to mitigate these risks.
Consolidation of DC schemes
TPR’s 2018 DC survey revealed that only 10% of schemes with fewer than 100 members meet two or more of the five key governance requirements (KGR) applicable to them. The most common reason given for not meeting the KGRs was that schemes did not believe it was relevant to a scheme like theirs (eg they were too small). TPR believes that such schemes should consider on an annual basis, as part of their value for members assessment, whether they should consolidate into a larger scheme in order to improve member outcomes.
Schemes that do not meet the standards required for governance or administration may be subject to TPR investigation and enforcement measures and encouraged to wind up, transferring members’ funds to a master trust or a Group Personal Pension arrangement.
TPR recognizes that such transfers, without members’ consent, may not be straightforward where members’ funds are invested in a with-profits policy (or any other form of investment that carries a guarantee). Suggested solutions to overcome this are to assign the policies to the individual members or to offer them an uplift in fund value to compensate for the loss of the guarantee.
Comment
It is clear that being small is no longer an excuse for not exercising high levels of governance. We consider that there is a delicate balance to be struck here; members should not have to suffer detriment as a result of inadequate trustee governance (and this is particularly relevant in DC schemes). Equally, there are many small schemes – with limited funds available for scheme management – where the trustees are approaching governance with the right attitude but stand to be penalised for not spending money on unnecessary box-ticking exercises.
TPR is clearly accelerating the push towards consolidation – of both DB and DC schemes. Will it be a one-way direction of travel or, like the tide, will it ebb after the initial flow?