Of general interest to all schemes is the launch of TPR’s initiative in pursuit of what it calls “21st century trusteeship”. In our update for August 2016, we reported that TPR had published a consultation paper under this banner, seeking views on how the standards of trusteeship in occupational schemes could be raised.
TPR has now published a summary of responses to that consultation and it confirms that a new initiative will be launched in 2017, including the following three steps to achieve TPR’s aim of improving scheme governance:
- using more targeted education and tools to raise the standards of poor trustees;
- setting out clearly what TPR means in practice by the higher standards expected of professional trustees and chairs; and
- using tougher enforcement measures against failing trustees.
It also proposes to consolidate the current governance regime into key overarching pieces of guidance to cover the principles or issues common to all pension schemes.
TPR will encourage the trustees of small DC schemes struggling to meet the appropriate governance standards to consider whether possible consolidation with another scheme or schemes may be beneficial. Clarification will also be provided on the role of professional trustees and the responsibilities and accountabilities that TPR expects them to meet, as part of the consultation on its penalty policy, early in 2017.
The main points in the response paper are summarised below.
The importance of good governance
The response confirms a consensus among respondents that good governance is essential for good member outcomes, and there was strong support for an improvement in governance standards. At the same time, respondents stated that TPR’s focus should be on supporting trustees who need it through education and on increased use of its enforcement powers by targeting poorly-run schemes.
Suggestions for raising standards included:
- a robust selection process, focused on the competence of the candidates and how they meet the needs of the scheme;
- all schemes to have an effective chair of trustees, perhaps extending to DB schemes the requirement to have a chair;
- regular trustee board evaluations, involving the assessment of skills and knowledge gaps and taking appropriate action; and
- greater transparency and accountability, perhaps including the alignment of compliance and governance reporting requirements across DB and DC schemes, but without imposing an additional burden on schemes.
Minimum qualifications for chairs and lay trustees
Most respondents were against some form of mandatory qualification or entry requirement for lay trustees or chairs, although there was agreement that some form of entry requirement for professional trustees was desirable. The idea of a probation period was also rejected.
The idea of minimum qualifications was rejected as not adequately reflecting the broad range of skills, knowledge and attitude required by trustees. Similarly, a good chair’s strengths were seen as more “behavioural” than requiring specific qualifications.
The respondents’ views were that diversity on boards was desirable and there was a concern that setting qualification requirements could be a barrier to this.
Ongoing trustee training and knowledge requirements
The idea of mandatory continuous professional development (CPD) was rejected by respondents as placing too onerous a burden on employers and trustees. However, many thought it would be more appropriate to promote voluntary take-up of existing CPD frameworks or to encourage trustees to focus on having the appropriate framework to facilitate regular training.
Similarly, there was not support for making the Regulator’s “trustee toolkit” mandatory.
Professional trustees – formal qualifications seen as inappropriate
In its consultation document TPR stated that its research confirmed a trend in the “professionalisation” of trustees, with the proportion of schemes without a professional trustee decreasing in the last five years due to increased governance and the “greater complexity associated with running pension schemes”.
Most respondents were in favour of barriers to entry for professional trustees and thought they should uphold higher standards and be able to demonstrate their expertise. However, despite this, there was no clear agreement on what such standards would be. It was recognised that, for example, formal qualifications were not necessarily a measure of the experience or skills required to be a competent professional trustee.
There was some support for the definition of what constitutes a “professional trustee”, in particular that defining the role solely by the fact that compensation was paid was not a useful measure as many lay trustees also receive payment.
Scheme advisers and managing conflicts of interests
Respondents noted that there were many challenges for trustees in engaging effectively with their third party advisers, including lack of strategic oversight, unclear delegation structure, and lack of resources. Some suggestions for improving relationships, particularly on administration and guidance, included:
- regular meetings between advisers and trustees;
- better management of conflicts of interest;
- using sub-committees to manage advisers;
- using independent procurement advisers and reviewing advisers; and
- putting in place (and reviewing regularly) appropriate processes and protocols to identify, monitor and manage conflicts.
Dealing with schemes failing to provide good governance and schemes consolidation
Respondents broadly agreed that TPR’s principal focus should be on supporting trustees and providing education, in addition to the increased use of TPR’s powers to target poorly run schemes.
There was qualified support for consolidation of schemes where this would improve member outcomes, also some risks and practical problems were noted. Although consolidation of poorly-run small DC schemes into master trusts was a possible option (and was already taking place) the costs of such consolidation should not fall on scheme members.
For DB schemes, the many different benefit structures were cited as a clear obstacle to consolidation.
Enforcement and scheme consolidation
TPR will take action where trustees or managers are unable or unwilling to meet the expected governance standards, and it does not rule out using its enforcement powers more widely, by means of an updated compliance and enforcement policy, if necessary.
TPR emphasises that it will look to increase engagement with schemes, particularly those who are currently failing in their governance duties, to see what can be done to address this failure. It will ask schemes, particularly small DC schemes falling short of the acceptable standard, to consider if they can improve. If not, and they find it difficult to achieve value for members, they will be asked to consider whether alternatives such as consolidating their scheme into another scheme may be more beneficial. TPR notes that this is “a complex issue” and that it will work with the DWP and pensions industry to identify how barriers to consolidation can be overcome, including use of shared service platforms, consolidated trustee boards and potentially full scheme consolidation within, for example, authorised master trusts.
TPR’s next steps
TPR’s approach is founded on the message that “good governance matters”. It states that past research has shown the “poor-good” governance gap to be worth at least 1-2 per cent of additional return per annum for members. TPR’s research shows that governance is currently “patchy” and not all schemes are meeting the expected standards, and TPR states that members should not suffer poor outcomes because they happen to be in a scheme that is poorly run; all occupational scheme members have a right to expect that their savings are being looked after.
TPR sets out three steps it will take to drive up standards of governance and administration, and to improve the competence of those managing occupational pension schemes and public service schemes:
- using more targeted education and tools to raise the standards of poor trustees;
- setting out clearly what it means in practice by the higher standards it already expects of professional trustees and the specific qualities and skills it expects chairs to bring to trustee boards;
- using tougher enforcement against trustees who fail to meet the required standards.
Schemes will be expected to meet the standards required and, for those currently not doing so, to meet them quickly.
TPR is clear that it does not intend to impose new standards of governance and administration but that it wants to see compliance with those standards that are currently in place. As such it intends to focus on the “building blocks” of governance, namely:
- board competence (with greater focus on skills), including recruitment and succession planning, skills and knowledge assessments, performance reviews, action plans and ongoing training and development;
- clear roles, responsibilities and accountabilities for key scheme participants;
- effective governance structures and decision-making processes; and
- effective business planning.
TPR intends to publish clarification on the definition of a “professional trustee” as part of a consultation on its penalty policy “in the first part of ”. In addition, as part of its guidance on investment policy, also due in 2017, it will focus on areas that are key to improving member outcomes, such as investment governance, conflicts of interest, administration and record-keeping.
Practical online tools
As part of its drive to improve governance, it will also signpost existing materials that may assist trustees as well as produce further “practical tools”, such as templates, checklists, best practice examples and case studies. This will be coupled with changes next year to streamline and consolidate the existing guidance into “key overarching pieces of guidance to cover the principles or issues common to all pension schemes”. It will also be improving the functionality of its website. The education campaign will start in “Spring ”.
The results of this campaign to improve scheme governance will then be reviewed and TPR will consider whether a “fit and proper” regime, including barriers to entry as a trustee, should be introduced. This mirrors the requirements being introduced for the new master trust authorisation regime and the new IORP II requirements.
TPR’s response centres on the premise that “good governance matters”. However, the response reflects that put such a regime in place is no easy matter. While there was a broad acceptance from the respondents that improvement was necessary, there was no unified agreement on how this could be achieved.
However, TPR seems quite determined to address poor governance, with priorities including improving trustee education and support, harmonising guidance, improving its website, greater use of engagement and, if needed, enforcement.
Given that there is currently extensive TPR guidance on scheme governance, any addition to online materials and toolkits may be viewed with trepidation, as it will mean more work for both schemes and their advisers. However, clarification on the role of the professional trustee, including the expected standards, and the responsibilities and accountabilities which TPR expects them to meet, will be welcomed as a way of measuring the value they bring to boards.
In addition, the issue of scheme consolidation is of interest, and this is a key aspect of the House of Commons Select Committee’s report on DB pension schemes (see below). Historically, TPR has found that smaller schemes are much less likely to have good governance than are larger ones, and this may form a part of future policy on protecting good member outcomes.
View TPR’s response paper.