In the wake of several high profile pensions cases, a number of initiatives from The Pensions Regulator (TPR) in recent months show a more robust stance being taken. Key emerging themes, supported in TPR’s 3 year corporate plan and the Department of Work and Pensions’ (DWP) Tailored Review of The Pensions Regulator, highlight its mission to become a more proactive and clearer, quicker and tougher regulator – but will this result in a ‘smarter’ regulator?


TPR Future

Launched in September 2018, ‘TPR Future’ introduced a new approach to regulatory supervision encouraging schemes to engage, to meet required standards, and emphasising the Regulator’s drive to provide clearer, quicker and tougher action. TPR Future also recognised TPR’s role as part of a wider framework of financial sector supervision.

TPR Future focuses on proactive engagement with a wide range of schemes and aims to provide clearer guidance about the Regulator’s expectations. While continuing to educate and support schemes, a tougher stance is expected for those who are wilfully ignoring or avoiding responsibilities, with member protection remaining paramount. TPR Future encourages focus on those areas where members face the greatest risks.

Four key areas form the basis of TPR’s new approach, being the setting of clear and measurable expectations, early identification of risk, driving compliance through supervision / enforcement, and working with others.

A select population of larger schemes have been identified through horizon scanning and are subject to one-to-one regulatory supervision with a nominated TPR contact. Additional and escalating regulatory effort will be focussed on schemes failing TPR’s standards. Different approaches to scrutiny will be tested and TPR have not ruled out issuing improvement plans.

A second strata of schemes will experience interactions based on a specific regulatory risk or issue, again making use of a range of possible interventions and regulatory action where required. These may vary from the appointment of a nominated TPR contact to letters, phone calls and participation in thematic reviews. In addition, schemes must complete a scheme return.

Publication of compliance failures reinforces TPR’s zero tolerance towards poor governance.

As the new approach takes hold, TPR will publish key achievements, review the effectiveness of their work, measure and track successes, and provide opportunities for feedback. Overall, scheme members will benefit from increased assurance that workplace pensions are secure. As the recent Tailored Review put it, ‘TPRF is a robust programme of change to meet the future needs of the occupational pensions industry’.

Protecting Defined Benefit Pension Schemes

Building on TPR’s new approach, in May, David Fairs (TPR’s executive director for regulatory policy, analysis and advice), outlined The Regulator’s vision for a revised Code of Practice on Scheme Funding, setting out the need for a long-term view of funding and investment strategy and making a distinction between open and closed schemes due to their maturity profiles. Emphasising that affordability is key, TPR will seek views on length of acceptable recovery plans in the context of strength of employer covenant, and considering the role of contingent support and investment strategy.

The aim is for the new code to provide a straightforward, fast track to demonstrating compliance whilst retaining flexibility.

Two consultations are expected; the first focusing on options for a DB funding framework and the second on the supporting legislative package. This follows the February 2019 Government response to the 2018 White Paper ‘Protecting Defined Benefit Pension Schemes’ which sets out improvements to TPR’s powers enabling it to be more proactive, to obtain timely information, to gain redress and to deter reckless behaviour. Whilst recognising that the majority of employers comply with their obligations, the Government intend to enhance TPR’s power to enable more effective intervention. Key proposals include:

  • Enhancements to the notifiable events regime to include notification of the sale of a material proportion of the business or assets of an employer and the granting of security on a debt with priority over the scheme. Further consultation will follow on the details and TPR will revise its Code of Practice and guidance
  • A Declaration of Intent in relation to corporate transactions requiring corporate planners to share certain proposals with trustees and TPR. The Government will work with TPR on implementation of these proposals, including timing requirements, which may prove contentious if the proposed transaction is commercially sensitive
  • Tougher penalties with maximum fines of up to £1m and the introduction of new criminal offences (for reckless actions such as allowing unsustainable deficits or excessive investment risks) and additional powers for TPR in relation to interviews and inspections. Proposals include unlimited fines and civil proceedings for failure to comply with a Contribution Notice. Indeed, the Tailored Review goes further suggesting that TPR should be given more freedom and the power to create rules surrounding their information requirements.

In addition, the Contribution Notice regime will be strengthened and the Financial Support Notices (FSN), previously Financial Support Direction, regime will be streamlined and broadened. The Regulated Apportionment Arrangement (RAA) regime was noted for further consideration. A suggestion for a mandatory clearance procedure around corporate restructuring raised concerns of disproportionate effects on normal economic activity. TPR guidance on the clearance process will be clarified.

Annual Funding Statement

TPR published their Annual Funding Statement 2019 in March. The 2019 statement outlines TPR’s expectation for a long-term funding target (LTFT) and journey plan to its achievement.

The statement sets out expectations for an investment strategy which is consistent with the LTFT, together with TPR’s views on the employer covenant and funding.

TPR’s new approach will include contacting schemes where there are concerns around aspects of the funding and investment approach, particularly focused on equitable treatment of stakeholders and the length of recovery plans. The statement makes clear that, whilst not condoning late valuations, TPR’s preference is for the best outcome, rather than a time compliant but sub-optimal result. A revised funding code is expected next year.

Trustees’ approach to valuations is discussed, highlighting the need for trustees and employers to agree a clear strategy for achieving a long–term goal balancing investment risk, contributions and covenant support, with aligned shorter term strategies.

TPR’s expectations are set out in a series of tables stratified by funding, covenant strength and maturity of the scheme, and containing considerations of appropriate alternative actions. The Statement goes on to clarify that it will consider a recovery period too long ‘if a relatively mature scheme with a strong employer has a recovery plan in excess of the average length for the universe of schemes’.

These messages are reinforced in TPR’s 3 year corporate plan.

In summary, the underlying messages from TPR indicate cohesive and joined-up thinking leading to transparency in the Regulator’s approach. Ultimately, clearer, quicker and tougher regulation should promote confidence in pensions saving… however, ‘smarter’ regulation will be dependent on successful delivery and implementation, backed by appropriate resources.

Anne Rodriguez
Senior Manager – KPMG LLP


Akash Rooprai Head of Client Management, ITM
David Fairs The Pensions Regulator, Executive Director for Regulatory Policy, Analysis and Advice
Emma Watkins Bulk Annuities Director, Scottish Widows
Jane Kola Partner, ARC Pensions Law
Stephanie HawthorneFreelance Journalist and Chair


Is poor data the elephant in the room when it comes to buyout? Freelance journalist Stephanie Hawthorne chaired a PMI round table on data and derisking. Here are the key takeaways:


Stephanie Hawthorne: What is the state of pension scheme data? Is it more ‘dog’s dinner’ than digital perfection?

Akash Rooprai: The reality is somewhere in the middle but particular focus is needed when it comes to buyout.

Jane Kola: Getting to the bottom of the legal side of the coin is as important as the data. I have worked with schemes going back before the first world war. Those people are probably not with us but you never know, there may be one or two. It is all about the art of the possible. You may have gaps. The gaps will have to be dealt with by taking some risk and making some assumptions.

Emma Watkins: If you provide data which gives marital status, spouses’ date of birth and those are better than the assumptions I might otherwise have used, you will get a better price.

David Fairs: I see data as part of a broader issue around administration. 14 administrators cover 70 per cent of the market. Any one of us could set up an admin firm in our bedroom and do that in a completely unregulated way. Trustees don’t focus on data enough. There is a GMP working group. To get through that, you need working data, regardless of whether you are imminently about to do a transaction or not.

Jane Kola: Not enough time is spent on liabilities.

Akash Rooprai: There is not enough discussion on data issues, not just data in isolation but data linked to the documentation. If the data is incorrect, then the target you are aiming for is incorrect.

Emma Watkins: The market is really busy. Insurers are probably declining 30% to 50% of cases. We assess how confident we are that this case will transact, and one measure is how seriously the pension scheme has approached the data. If we are not satisfied they are invested in this, we will decline the business.

David Fairs: Data is going to have to be accurate and complete, and provided to the dashboard in a timely fashion. There is no easy route out of this. You are going to have to address the quality of data. It is just a question of when. We are launching an initiative and are approaching several hundred schemes and we will target the schemes where we think we are most likely to find issues. We will give them a period of time to sort out the data. If schemes are unwilling to do so, we will take stronger action in the form of an improvement notice. It could be a failure of internal controls. If it is sufficiently bad, we will appoint a different trustee.

Stephanie Hawthorne: How much does data cleansing cost?

Akash Rooprai: In general terms, to do a data cleanse is going to costs a few thousand pounds. That could save you two or three percent on your buyout premium so for every £100m buyout premium, that could save you two or three million. The cost benefit is a no brainer.

Stephanie Hawthorne: What should be your priorities?

Jane Kola: Get the benefits right. Some schemes are overpaying people. That is very difficult but the situation is worse where people are being underpaid. There are always a few and they are entitled to more and should get more.

Stephanie Hawthorne: In case of a total mess up, is indemnity insurance worth the paper it is written on?

Emma Watkins: Most trustees have standard indemnity insurance in place. Use it correctly. Nothing is ideal but runoff insurance is pretty good.

Stephanie Hawthorne: What has been the worst data failing?

David Fairs: Last year lots of boxes were discovered in a warehouse which showed there were lots more members that the scheme didn’t know about. There are all sorts of those.

Stephanie Hawthorne: One lawyers’ survey estimated 61% of schemes didn’t have the data to sort GMP equalisation.

Jane Kola: That is an understatement. You need good data to sort it out. People are entitled to equal benefits. For many it will be a small sum but for some it will be a significant amount of money – it could be as much as 20% of their pension.

Akash Rooprai: The C2 method is the default. Actuaries will do a back of an envelope calculation and say it costs 2% of liabilities but it will cost 2% again in administration costs.

Emma Watkins: If you have equalised using C2, I am not enthusiastic. The alternative is conversion which I prefer.

Last words

David Fairs: Make sure your data is accurate and complete and well protected. We are seeing more and more phishing attacks or ransom ware being deployed to seize data. The dashboard is coming along and you are going to have to supply the data to the dashboard. Deal with data accuracy sooner rather than later. We are going to take action against those who don’t comply.

Emma Watkins: Don’t come to the market too soon before you are ready because data gets old and expires; do have a conversation with your insurer and your consultant over which additional data to hold which might get you a better price.

Akash Rooprai: Have a journey plan for your data. Think about all the things you are going to do: scheme member options, buyout, buy-in, and figure out how data will impact that. Then you can figure out what you are going to do and when. Make sure you keep track of manual records as well as digital details such as pension sharing on divorce or scheme pays.

Jane Kola: Preparation is everything and as the lawyer in the room, can someone please find the deeds, all of them? It is well worth getting the benefits sorted out. Once it is done they are not going to change very much. It gives you more credibility if you say you have been working on the specifications for five years and don’t leave it to the last minute. Discretion – trustees don’t like codifying discretion and trying to decide whether to give a discretionary benefit or not in the heat of negotiation is very difficult.

It has become the norm not to invite the administrators to trustee meetings unless there is a complaint. It is also the norm to see lawyers only once every three years. If you are better funded, now is the time for those voices to be heard.


Stephanie Hawthorne
Freelance Journalist and Chair


It has been true for a long time that, in general, the larger the employer you work for, the more likely you are to be saving in a workplace pension for your retirement, and large employers tend to make a larger contribution to the pension too.


Back in 2012, only 17% of the employees of the employers with 1-50 employees were enrolled in a workplace pension, compared to 40% for employers with more than 500 employees.

How has this been affected by the introduction of automatic enrolment, which started in 2012 affecting the biggest employers and has affected all employers, even the smallest and newest employers since 2018? Research by economists at the Institute for Fiscal Studies in London has found that – looking at eligible employees of small employer with less than 30 employees – automatic enrolment has increased their participation in a workplace pension scheme by around 45 percentage points. In other words, without automatic enrolment only 23% were saving for retirement in this way, and now 70% are, which is a transformation in the saving rate of people working for small employers.

While the jump up is high, the level of pension participation, even with automatic enrolment, is not as high as it is for medium and large employers, where it averages almost 90%.

So whereas only 1 in 10 workers leave their pension scheme working for big companies, it is around 3 in 10 for the smallest ones.

Why is this the case? Having investigated this in some detail, we have some – but not all – the answers.

One thing it could be is that people working for smaller employers are less well paid, and have often been working for their employers for less time than people who work for large employers. A higher salary and longer time in the job are both good predictors of being in a pension, but the differences are nowhere near large enough to explain this different participation rate. Similarly, although larger employers tend to offer more generous pension contributions, again the differences are not big enough to drive the difference.

This basically leaves two remaining explanations that must alone, or in combination, explaining the different trend. One is that the administration of pension schemes by small employers might reduce participation, either because they actively seek to get employees to opt out to reduce costs, or because their human resources departments are less effective at explaining the benefits of pensions to their employees. The other is that ‘peer effects’ are important. In large employers, when people are automatically enrolled, they are surrounded by colleagues who are already saving in a pension, and can help explain what it is and why it is important. This is often not the case in small employers, where no one is saving in a scheme.

Either way, this should not take away from the huge increase in pension saving for the employees of small employers, which make up almost 30% of all employees in the UK. But there is more to do to fully understand why the participation rate is lower in small employers, and see if it can be boosted further.


By Jonathan Cribb
Senior Research Economist – Institute for Fiscal Studies


The UK Corporate Governance Code July 2018 (UKCGC)1 states that executive pension contribution rates should be aligned with those available to the workforce. In a climate where chief executives in the FTSE 100 have been enjoying pension contribution rates of around 25-30% while their employees receive around 9-10% 2, this highlights the need for change.


The exact UKCGC wording is: “Only basic salary should be pensionable. The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce. The pension consequences and associated costs of basic salary increases and any other changes in pensionable remuneration, or contribution rates, particularly for directors close to retirement, should be carefully considered when compared with workforce arrangements”.

Accompanying guidance on board effectiveness says that while it may not be practical to alter existing contractual commitments in this regard, remuneration committees will need to ensure future contractual arrangements comply. The Investment Association (IA) took a stronger stance in its February 20193 warning saying that:

• Any new executive director appointee whose pension contribution is above the level of the majority of the workforce will result in a ‘red top’ alert on the remuneration report.
• Any existing executive director receiving a pension contribution of 25% of salary or more will be ‘amber topped’ on the remuneration report.

A ’red top’ is the highest level of warning issued by the IA’s Institutional Voting Information Service (which aids shareholders in voting decisions). It is reserved for “companies where shareholders should have the most significant and serious concerns”.

The IA Principles of Remuneration make it clear that for new appointees this needs to be addressed now. Whilst, for others, it needs to be addressed over time such that the pension contributions are be reduced over time to equal the rate received by the majority of the workforce. Allowing time to resolve these issues is a sensible approach given the fact that amending an executive’s pension contribution would usually involve a contractual change exercise and requires consideration of the executive’s remuneration package and incentives as a whole.

The risk of not following the UKCGC and the IA Principles of Remuneration is the risk of a vote against the remuneration policy.

The House of Commons Business, Energy and Industrial Strategy (BEIS) Committee issued a report in March 2019 echoing these sentiments and also stating that it believes that the primary responsibility for changing the environment on executive pay “rests with the asset owners – the pension funds that invest our money for the long term”.

There is a certain irony in the fact that it may be pension schemes themselves, in their capacity as institutional investors, that are best placed to put pressure on remuneration committees around pension policy for executives.

1. Applies to companies with a premium listing and to accounting periods beginning from 1 January 2019.
2. Source: Business, Energy and Industrial Strategy Committee report “Executive Rewards: Paying for Success”.
3. https://www. theinvestmentassociation.org/ media-centre/press-releases/2019/ investors-to-target-pension-perksand-poor-diversity-in-2019-agmseason.html

Anthea Whitton

Partner – Eversheds


Sitting on the panel at the Scottish Association of Pensions Lawyers’ debate on the Professional Pensions Trustee Standards (the ‘Standards’), I was asked if the expectations of trustee chairs were too high.


My response was to refer to The Pensions Regulator’s (TPR) comments that trustee chairs “should be prepared to assume similar governance responsibilities to those expected of a chair of any corporate board”.

This reminded me of a presentation at a recent conference that referred to the Corporate Code and how this could/ should apply to pension scheme governance. Reflecting on this response, I thought I’d look a little closer at how the Standards for Professional Pensions Trustee Chairs and the Corporate Code compare.

Now, the easy place to start is with the corporate need for a chair to be independent on appointment; this really shouldn’t need to be mentioned in the Standards as a professional trustee chair should almost, by definition, be independent. However, the Standards are quite clear on professional trustee conflict management.

The Standards require a professional chair to lead the board ensuring appropriate decisions are made and taking all key factors into account.

This is not very different from the corporate chair’s responsibility for its board’s overall effectiveness in directing the company whilst demonstrating objective judgement throughout their tenure. Similarly, the corporate requirement for promoting a culture of openness and debate is quite analogous to the expectation of the trustee chair to encourage full participation and open board discussions, using skills available on the trustee board to good effect.

Implied responsibility

One slightly controversial area is the implied responsibility of the trustee chair for the performance of other trustees. There is an expectation in the Standards for a professional trustee chair to manage the performance and effectiveness of the board to good effect, and operate effective succession planning.

Furthermore, they are expected to ensure that the knowledge and understanding of the trustee board is assessed and take steps if it does not meet the needs of the scheme. Of course, all trustees have this obligation under statute and the Standards give the nonchair professional trustee an obligation to support and assist the chair in their duties. The obligation being placed on trustee chairs is slightly weaker than the corporate chair who has a responsibility to ensure that the effectiveness of the board is evaluated annually, that the evaluation is acted on, that strengths are recognised, and weaknesses addressed. The Corporate Code requires that all directors engage and act on weaknesses.

This can be the biggest struggle on pensions boards with often long-standing lay trustees who are too busy with the day job and don’t/won’t recognise their trustee weaknesses.

The expectation of the trustee chair to manage succession effectively and the requirement to “take reasonable steps with the appointing party to review the length of their own appointment” is also straight out of the Corporate Code. Although nine years was chosen in that case for the maximum tenure rather than a maximum aggregate term of ten years in most cases for trustees. This, of course, relates to individuals; a professional trustee company with a true team-based approach can provide an automatic solution to chair succession planning without a loss of scheme knowledge.

Similarly, the Standards oblige the professional trustee to have clear terms of business that set out the basis of the relationship and expect the chair to organise appropriate committee structures to ensure efficient operation. Quite in keeping with the corporate need to have responsibilities clear and set out in writing. 

Sponsor engagement

Last but not least is the corporate requirement to have regular engagement with shareholders on significant matters, ensuring a clear understanding of the views of shareholders by the board as a whole. The pension scheme does not have shareholders and arguably the nearest equivalent is the beneficiaries i.e. those with a beneficial interest in the funds under trust.

However, especially in the case of a defined benefit scheme, the interests of the beneficiaries are clearly defined and whilst the trustees have a fiduciary obligation to protect those interests, the views of the beneficiaries are not key to the overall governance and management of the scheme at large. In this case the corporate sponsor takes the place of the shareholder.

It is the sponsor who holds the purse strings, who benefits directly from good performance and who has to fund any shortfalls caused by poor performance. Understanding the sponsor, its views, its business, its corporate governance, its performance, its attitude and ability to underwrite risk is essential to protecting the interests of the beneficiaries and the security of their benefits. This is, therefore, the analogous expectation under the Standards, a key responsibility of the board and possibly the most onerous duty of the professional chair. It is the professional chair who is expected to be the key interface with the sponsor, managing that relationship on behalf of the trustee board or ensuring that it is otherwise done to best effect. It is, furthermore, up to the chair to ensure that appropriate steps are taken to assess the covenant of the sponsor, now and in the future, and that this is taken into account on all funding and investment decisions.

In law all trustees are created equally, all have the same fiduciary obligations, and all have personal responsibility to ensure they comply with rules and regulations.

The Regulator quite understandably holds those of us charging fees and setting ourselves out as experts to a higher level, and the Standard separates professional chairs out for additional special treatment. However, this doesn’t differ much from the corporate world and, since pension schemes are generally a considerable cost centre of their supporting corporate, with proportionately a relatively large asset holding, this has to be right. 



Greg McGuiness

Trustee Representative – Dalriada Trustees

 


May made for interesting times in the pension world, with The Pensions Regulator (TPR) taking a hard line on compliance and HMRC bending a little to help the industry get things done. Bhavna Baines of Barnett Waddingham takes a brief look at some of the key pension topics for the month.


HMRC: Countdown Bulletin 45 – the clock briefly turns back

In an incredibly welcome turnaround, mid-May’s Countdown Bulletin 45 confirmed an extension to the previously expired deadline for payment of contracted-out equivalent premiums (CEPs). These tiny jewels in the GMP reconciliation crown allow GMP liability to be extinguished and State Pension reinstated for members with service under 2 years (or under 5 years in more historic cases).

Most of these members will have received a refund of contributions decades ago but, somehow, something fell out of the paper trail, maybe at the scheme side, maybe at HMRC’s, and the GMP wasn’t properly extinguished at the time. Much to their own surprise, when the GMP reconciliation data from HMRC first turned up, most schemes found themselves carrying tiny amounts of GMP liability for people they had literally no record of.

With Bulletin 45 extending the deadline to 4 June, we saw 2 weeks of fairly feverish activity across the industry as schemes rushed to submit their final requests. Inevitably there will still be cases where boats have been missed and schemes are still left saddled with rogue GMP benefits, however, with GMP equalisation adding even more urgency to the need to get these records absolutely right, even this short extension to the deadline was hugely helpful.

HMRC pension schemes newsletter 110

As life isn’t complicated or busy enough for pension schemes, HMRC also published pension schemes newsletter 110 which covers a range of topics including:

A consultation on the steps – the Government proposes to meet the UK’s expected obligation to transpose the fifth money laundering directive into national law. This includes a proposal that all UK resident express trusts, which will potentially cover most registered pension schemes, will be required to register with the Trust Registration Service. With the consultation due to close on 10 June, further updates will be announced on the ever increasing spiderweb that is pension scheme compliance.

TPR news – compliance and enforcement bulletin – no more Mr Nice Guy

In other news, May also saw TPR publish the latest edition of its quarterly compliance and enforcement bulletin, in which the Regulator provides an overview of how it used its powers between January and March 2019. This unassuming collection of pension crimes and misdemeanours across 4 cases studies should be required reading for anyone involved in pensions.

Several major outcomes during this quarter include:

• the first fraud conviction
• the first conviction for making prohibited employer related investments
• the first custodial sentence resulting from TPR prosecution
• the first time TPR have appointed a trustee to a scheme primarily because of a lack of competence amongst existing board members.


Bhavna Baines
Senior Technical Analyst – Barnett Waddingham


Setting the standard

Raising pension scheme governance standards is as hot a topic as ever. With recent developments in the area including the Pension Regulator’s (TPR) 21st Century Trustee programme, IORP II and new standards for professional trustees, there is a lot for trustees to get to grips with. TPR states that good governance is “the bedrock of a well run pension scheme”, and vital for achieving good member outcomes. Whilst we can all agree that effective trusteeship and governance are fundamental, the real challenge for trustees is working out what good governance looks like for them. TPR acknowledges that there is no single solution to delivering robust governance, so what is appropriate will depend upon the circumstances of the scheme and the trustees. With all that in mind, we suggest some practical steps for trustees to take on the path to good governance.


A good place to start

A trustee self-evaluation exercise is a good place to start. Take time to devise a questionnaire which draws out the key issues facing the scheme, and ask each trustee to complete it, giving their views on:

• their own level of trustee knowledge and understanding;
• the conduct of trustee meetings and business;
• existing governance processes and policies;
• advisers; and
• the relationship and interaction with the employer.

Collate the responses and identify any consistent themes or specific comments that should be addressed in more detail.

Business plan

TPR expects trustees to have a clear purpose and strategy in order to manage their schemes effectively. Having a business plan will help boards to look ahead, make best use of trustee time and ensure that all legal and regulatory requirements are met.

Business plans should include:

• clear, long-term goals for the scheme;
• interim objectives around key areas of focus (such as investments, funding and administration);
• how the trustees propose to meet these objectives and goals; and
• how the trustees will measure and monitor progress towards them.

Trustees should then use the results of the self-evaluation to prepare and review their business plan, forming the basis of their priorities for the coming year.

TKU


The law requires trustees to have knowledge and understanding of
the law relating to pensions and trusts, and the principles relating
to scheme funding and investment. Put simply, trustees need to
have sufficient knowledge and understanding to enable them
to properly discharge their duties. One step towards achieving
this is to implement a trustee training programme, with a clear
commitment from all trustees to meet the agreed agenda for
this. New trustees should be asked to commit to completing TPR’s
‘Trustee toolkit’ as soon as possible after appointment. The best
training is specific to the scheme and its circumstances. Generic
legal and regulatory updates are helpful, but trustees should ask
their advisers to speak, in particular, to the most relevant issues for
their scheme at each trustee meeting. As part of the business plan,
topical training could be scheduled to coincide with related trustee
decisions. A skills matrix can be a helpful tool for keeping track of
trustees’ relevant qualifications and experience, and a helpful point
of reference when allocating roles for sub-committees or delegating
authority to working groups to take forward specific issues.

Getting to know the scheme documents

Trustees are required to be ’conversant’ with their scheme’s governing, investment and funding documents, having a working knowledge of relevant documents so that they can use them effectively. If the scheme rules are old and unwieldy, this may seem an impossible task. Schemes could consider a formal rewrite of their rules into plain English, although for many schemes this is likely to be disproportionately expensive. Alternative documents trustees can use to help ensure that they are familiar with the key provisions of their scheme rules include a balance of powers table, noting each of the key powers in the scheme rules, who holds that power and in what circumstances it can be exercised.

Another helpful tool is a trustee handbook, pulling together the main governance documents for the scheme. Typically, a handbook provides a short summary of the key provisions in the scheme rules along with the relevant legislation and guidance. It can be expanded to note important trustee decisions, advice and administrative practice, and could also include governance policies, such as those on whistleblowing or notifiable events and the risk register. The handbook will then be given to new trustees on appointment as part of the induction process.

Clear roles and responsibilities

Pension schemes are increasingly complex. Trustees usually delegate responsibility for certain day-to-day functions to in-house teams or third party providers such as scheme administrators. However, as trustees remain accountable for all scheme activities, it’s important for them to be on top of their delegations.

A table recording to whom the trustees have delegated their powers, and on what terms, is useful here. This should be a living document, which the trustees review periodically to determine whether the delegation and its agreed parameters remain appropriate. For delegations to sub-committees of the board, clear terms of reference should be in place, setting out the committee’s remit, the extent of their authority and the circumstances in which matters should be referred to the board.

Ongoing obligation

With TPR’s recent announcement in its 2019-2022 Corporate Plan that it will now launch phase two of its 21st Century Trustee programme (focussing on the make up of trustee boards, competency standards and accreditation for professional trustees), governance needs to stay high on trustees’ agendas.

TPR is clear that it will intensify its focus on and take action against schemes with governance failings. There is no denying that good governance will cost time and money – but as TPR points out, ‘investing in good governance is likely to save you in the long run’.


Kirsty Pake
Associate – Sackers


“Creating good culture With the right people, culture and values, you can accomplish great things.”


The above quote comes from the US businesswoman Tricia Griffiths. How often, however, do we in the pensions industry focus on good culture? The Pension Regulator’s 21st Century Governance campaign talked little about the importance of culture, instead focusing in the main on traditional areas of governance such as policies, meeting processes and risk management.


A simple definition of culture would be ‘the way we do things around here’ and the culture of a pension board, ‘the way we do things on this board’. To find out what ‘the way we do things’ looks like requires a step back from the day-to-day running of a pension scheme. This may be difficult to find given the increasingly complex demands of pension scheme governance but could be vitally important to the success of the scheme and ultimately to member outcomes. A board with a good culture is an attractive board for others to join and thereby assists with succession planning. A board with a good culture is strong yet flexible and makes good quality decisions. A board with a good culture is an asset to any pension scheme.

What words would describe your board? Is it a board where members feel empowered to have open and honest discussions, where new ideas are welcomed, where discussions consider alternative viewpoints and decisions are made after careful deliberation? Is it a place where counterproductive behaviour is dealt with swiftly and appropriately? Or does it have a stale and old-fashioned feel, with new ideas passing it by, or overdominated by one or two loud and confident individuals?! Culture is a difficult thing to define, but it is not something that should just be left to develop by chance. A good culture develops because of the right people being in place, the right tone being set, and clear and robust values which are lived and enforced.

People, leadership and values

Getting the right people on a board is critical to its success. It is also important to have the right number of people. Too large a board can be unwieldly and inefficient whereas a very small board can run the risk of lacking diversity of thought. Within the agreed optimal structure, the people who make up that board must be engaged, committed, and together have a diversity of background, experience and skills which enables the board to collectively function well.

In governance circles it is common to talk of the ‘tone from the top’ meaning that the leaders in an organisation need to live the values of that organisation for them to hold any weight, for them to be believed in and followed by others. The leadership of a pension board often rests in the Chair role, and it’s critical that the Chair does indeed set the parameters of how meetings will run in a cultural sense as well as a practical one, inviting opinions from all, being firm in curtailing excessive contributions that don’t add value, and challenging advisers where appropriate.

However, it is not just up to the Chair to set the cultural tone; the best way to do this is likely to be through agreeing the values and style of how the board will operate through a consensus from the whole board, perhaps to be evaluated and retested at an annual away-day or governance review meeting.

Creating good culture through soft-skills development

Despite a slow start, the pensions industry is finally waking up to the importance of soft-skills. These are skills like communication, awareness, adaptability, preparation, sense of collaboration, and strategic thinking. Testing such skills is due to form part of the professional trustee accreditation regime and increasingly pension governance bodies are recognising that such skills, which are all part of a good culture, contribute significantly to their ability to make effective decisions. This is particularly the case in defending against the unconscious bias that can run through decision making. I outline some of these below:

Anchoring occurs when an initial idea is presented (‘the anchor’). This anchor sets the baseline for the following discussion, often affecting the interpretation of future information. For example, when a dominant member of the board takes a very strong view on investment strategy at the start of a discussion, it is very likely that this will heavily sway the ultimate decision.

Good board culture, that does not allow overdominance and whose members are self aware, helps to mitigate this risk.

Groupthink occurs when a desire for harmony in a group and the minimisation of conflict to reach a consensus decision quickly leads to a poor decision. Good culture, which is not about harmony at all costs, but about open and appropriate challenge, and considering all reasonable courses of action, will mitigate against this tendency.

Overconfidence occurs because individuals tend to overestimate their own abilities, knowledge and skills. A culture of reflectiveness, peer challenge, and good use of advisers, will help with this common human tendency.

Sunk cost fallacy occurs when a bad decision or loss has been made in the past, yet individuals continue to stand by it because of the investment they have already made. A board that has a culture of being able to recognise when it is time to make a change and take swift action to correct issues will assist in this case.

Status quo bias occurs because it is often human nature to stick with the current situation: better the devil you know’! A culture open to new and fresh ideas and input is a living culture, one that does not stagnate and become stale. In its 2016 report on board culture, the Financial Reporting Council argued that the value of culture should be recognised as a source of competitive advantage, ‘vital to the creation and protection of long-term value.’ Whilst pension scheme boards are not looking for competitive advantage, they are certainly concerned with long-term value for the pension scheme members. Greater attention to board culture can only assist with this focus on long-term value. Let’s challenge our own status quo bias which may lead us to focus heavily on process, policy and technical matters.

Good culture is the heart of good governance.



Laura Andrikopoulos

Head of DC Governance –Hymans Robertson



The terms ‘risk reduction’ and ‘de-risking’ are used frequently in relation to pensions, but usually focus on investment strategy. What other ways can pension schemes reduce risk in the administration, provision and communication of pensions to individuals?


As anyone involved in the planning of, or attendance at, trustee board meetings will know, investment management is frequently the main focus of trustees’ attention; achieving the best investment returns from assets, whilst simultaneously reducing exposure to risk, with the aim of securing a well funded future for its members. However, it could be argued that the priority is oftentimes too heavily focused on risk reduction from a purely investmentfocused and liability reduction perspective. This essay will examine the argument that, given the modern day landscape of pensions and the associated risks to pension schemes that go with this, it would be wise for trustees to also consider ‘risk reduction’ or ‘de-risking’ strategies from a more comprehensive administration perspective.


Historically, employers established ‘final salary’ or defined benefit (DB) pension schemes and adopted a paternalistic approach by ensuring their staff and their spouses were taken care of through provision of certainty of income in retirement, with little engagement required on the part of the employee.

However, as society has changed, so has the way many of us live our lives; people now demand more flexibility and choice in their financial affairs.

Since the Pension Schemes Act 2015, members are able to access their benefits flexibly, and deferred DB members have a statutory right to request a transfer quotation up to twelve months prior to their normal retirement date. As a result, over one million members have accessed their benefits flexibly since April 2015, with the risk that a proportion of these members may have withdrawn their pension savings as large lump sums which could be heavily taxed and spent without thought for the future, leaving them with little income in their later years. Additionally, with increasing longevity, it would seem that 55 is a relatively young age to access funds that may have to provide for an individual over the next 40 years. The State Pension age is continually being pushed back, and may even be withdrawn altogether in the future, with the danger that many will not have this to rely upon for additional income in retirement.

Under pension freedoms legislation, members are required to seek advice from a regulated financial adviser qualified in giving advice on transfers from DB to Defined Contribution (DC) schemes in order to transfer benefits worth over £30,000 in this manner, which should, in theory, ensure only members who are better off accessing their benefits flexibly will do so. However, high street financial advice has never been so freely available, and so members could be at risk of being taken advantage of by unscrupulous advisers. One way in which trustees could mitigate this risk is by providing members with access to a pre-vetted independent financial adviser with the appropriate advice skills in order to ensure members are only receiving advice that is impartial and appropriate, and reduce the risk that they will make a decision they will later come to regret.

This is particularly important when an employer is undertaking any wider exercise, such as bulk or enhanced transfer-out exercises, where the primary objective is to reduce DB scheme liabilities as a result of members transferring their benefits elsewhere.

Financial risk to members, however, is not limited to this.Members are also at risk of falling victim to scams, and losing some or all of their savings to fraudsters.

With the advent of modern technology, fraudster tactics are becoming ever more sophisticated and convincing, with the result that The Pensions Regulator (TPR) estimates that in 2017 alone, scam victims lost an average of £91,000 each. Trustees can play their part in minimising this risk, however, by continually reinforcing the message to members that scams do exist, and the need to be vigilant. Clear signposting is vital in all communications with members, as well as driving home simple messages, such as to ignore cold callers who attempt to discuss your pension (which is now illegal). Trustees should also seek assurances that their administrator is undertaking the required due diligence at the point of transfer. This risk could be further mitigated if administrators were permitted to share information with each other, perhaps through the use of a ‘blacklist’ which could be used to keep track of known scam suspects. Schemes may also find tools such as The Pensions Administration Standards Association (PASA) guidance is useful in this regard.

However, threats to the security and integrity of members’ benefits are not always external. Trustees are heavily reliant on good quality advice in order to effectively run the schemes for which they are responsible. There is an ever-present, albeit lower, risk to trustees of receiving misguided advice or of maladministration. A poorly run scheme is more likely to have a direct adverse financial effect on members. For example, the miscalculation of, and resulting over/ underpayment of benefits. This can result in member recourse claims down the line and the added unwelcome reputational risk to the sponsor associated with the scheme.

These risks can be managed effectively through good quality administration and governance. Good quality administration is one of the most important risk controls trustees can put in place, and therefore trustees should be mindful of the importance of this when tendering for administration services, and not only to focus on sourcing the lowest cost provider. Similarly, trustees should not underestimate the importance of good scheme governance, which helps to ensure that schemes operate according to both their own rules and within legal guidelines. Many recurring scheme events, such as the distributing of annual benefit statements, submission of scheme returns, or completion of the Trustee’s Report & Accounts, are subject to timescales by law, with consequences for non-adherence. These risks can be mitigated however, through the use of an annual planner or calendar that effectively charts the progress of the various scheme events that are required at different times of the year. From a wider advisory perspective, trustees should also ensure that advisers have implemented risk management procedures of their own; for example, regular Audit and Assurance Faculty (AAF) audits to evidence sufficient internal controls for security of member data, and having a Business Continuity Plan in place to limit the consequences from disasters. Trustees are also required to maintain a Risk Register to monitor and manage risks, and should include the risks that external advisers present with regards to investment advice, legal advice, data control or day-to-day administration. For this reason, trustees may find a helpful addition to their risk management procedures is to employ a dedicated Pension Management service to assist in the management of scheme governance on their behalf, and ensure that it is not approached merely as a ‘tick box’ exercise.

On a related note, TPR has issued guidance to trustees on cybersecurity, which represents a severe risk to pension schemes. Insufficient controls for the storage and transfer of data not only jeopardises the integrity of the scheme, but also puts members at risk of falling victim to identity theft and fraud. Trustees can reduce this risk by ensuring there are robust cybersecurity controls in place and a policy governing the use and storage of data.

Finally, there are the risks associated with poor member education and engagement. With the gradual reduction in the availability of DB schemes, and the growing prevalence of DC schemes, it is becoming more important that members become engaged with their retirement provision. However, with increasing pressures on the generation of ‘millennials’ such as rising house prices and insecure employment contracts, there is a risk that pensions are at the bottom of a long list of higher priorities.

Additionally, a recent survey by Moneywise found that the majority of young people find their workplace pension schemes too confusing to understand. A related risk to this is that members underestimate how much they need to save to provide for a comfortable retirement. This is a risk that is unlikely to be tackled by only issuing the minimum communications required by law, such as annual benefit statements or Summary Funding Statements, and requires more thought and consideration of the tone and medium used.

Trustees should therefore assess the needs of their particular membership demographic when considering how best to engage. For example, is it better for a scheme with a young membership to utilise online tools and apps, as opposed to paper communications?

However, trustees do need to bear in mind the fine line in all communications between encouraging /engaging members, and actively advising them, which is a regulated activity.

In conclusion, there are many ways trustees can reduce risk in the provision, communication and administration of a scheme. The majority of risks highlighted here can be minimised through a combination of selecting high quality scheme advisers and by performing effective scheme governance, as well as suitably engaging their members. As a result, trustees should be able to reduce the risk that a pension scheme causes its members to suffer from a loss of financial security; a clear contradiction in terms, and ultimately the most serious risk to a pension scheme of all.


Chris Burtenshaw
Assistant Pensions Management Consultant – Barnett Waddingham



The terms ‘risk reduction’ and ‘de-risking’ are used frequently in relation to pensions, but usually focus on investment strategy. What other ways can pension schemes reduce risk in the administration, provision and communication of pensions to individuals?


In the context of pensions, the terms ‘risk reduction’ and ‘de-risking’ are abundant. The performance of funded pension arrangements is most obviously measured by the performance of the scheme assets and the suitability of the investment strategy which underpins it. It is important to recognise, however, that ‘risk reduction’ and ‘de-risking’ extends beyond the balance sheet and can (and should) contribute to approaching areas other than investment, as part of a holistic approach to providing sound retirement benefits.


The handling of transfers are a considerable source of concern for Trustees. As a case in point, the closure of the British Steel Pension Scheme (BSPS) offered unscrupulous financial advisers pretext to target uninformed members, causing considerable damage to their retirement savings. The Financial Conduct Authority stepped into action – because of which, for example, contingent charging (which might bias advisers to put profits before professional obligations) was banned. This is a clear example of where positive regulatory action was taken to curb member risk. The recent case of Mr N v Northumbria Police Authority (PO-12763) highlighted that the detection and prevention of pension scams still leaves much to be desired. The Pension Scams Industry Group’s Code of Good Practice on Combating Pension Scams is a welcome example of industry intervention, but compliance is ultimately voluntary. While the Pension Regulator’s Codes of Practice are also not statements of law, they are taken into account by Courts and Tribunals. Given that pension scams can lead to HMRC’s unauthorised payment charges (levied on the Scheme and of course the member), it is in the interest of Trustees and Managers to ensure that the risk of payments being made to pension scams is mitigated as far as possible. I firmly believe that the industry should seek that the Regulator fully adopts the Code thus giving it equal weighting to other Codes of Practice, in doing so addressing a very real and emergent issue. Schemes will thusly be motivated to move away from a box-ticking approach and innovate as far as is practicable. 38% of non-retirees have no private pension provision (Page 46, FCA ‘Financial Lives’ survey, June 2018) and those that do must be safeguarded.

Electronic systems are a staple of the modern pension administrator, enabling rapid data transmission and automation which can simplify and reduce risk in an administrator’s role. From a client and member-experience perspective automation is a good thing (where system routines and controls are comprehensive) as it can allow services to be offered accurately and in reduced timeframes. At the same time, however, increased automation might be seen to reduce need for sophisticated training in certain areas, at extremes running the risk of creating pension administrators who simply do not know how to administrate beyond a flow of system prompts. No system is infallible, and without enough available technical knowledge about the provisions of a Scheme, teams may struggle to cope during system downtime. In addition, individuals who develop limited practical knowledge in their role might find themselves ill-suited to progress into more practical positions (which, indeed, might involve the development of automated systems considering new legislation). I feel that a considerable proportion of those at the industry’s apex will certainly be those that have been there the longest, but in no small part due to learning and progressing without system advancements which newer professionals may take for granted. These individuals will seek their own retirement in time and we must be able to fill their shoes when they do. Automation is a noble pursuit, but it must be complementary to robust technical training rather than instead of it, lest we create a bottleneck of professionals who can wax lyrical about ‘what’ they do, but not ‘why’ or ‘how’ their system processes it.

While staff training is by no means a radical concept (and I have enjoyed thorough training in my employment), there is an emerging industry risk that as systems become more sophisticated we put microchips ahead of micromanagement- which left unchecked will ultimately hinder the development of skillsets and harm the companies involved in retirement provision.

When people think of pensions, they think of lifetime annuities and ‘gold plated’ scheme pensions- such as those which their parents or grandparents might enjoy. The prevalence of these options can be traced back to the Radley Commission of 1888, which rejected the payment of benefits as lump sums on the basis that “in the event of providence or misfortune in the use of it, [the retired member] may be reduced to circumstances which might lead to him being an applicant for public or private charity.” The Taxation of Pensions Act 2014 is in my view the most important piece of pension legislation to be introduced since the Appointed Day. Although the concepts of Capped and Flexible Drawdown already existed, even in facilitating ad-hoc encashment of an individual’s pension pot, reference was made to the annuity an individual might be able to get or the amount of secured income an individual had at the time. To this end, the introduction of Uncrystallised Funds Pension Lump Sums and Flexible Access Drawdown (and the readability with which these options are available) have cut away the pensions red tape- or as the cynical might say, the safety nets. Pension Wise (soon to be part of the new Money and Pensions Service, formerly the Single Financial Guidance Body) was established in response and additional disclosure retirements were introduced, including the requirement to provide retirement risk warnings and signpost to Pension Wise. While these are welcome steps, as part of its remit the Money and Pensions Service can and should strive to do more once it launches in 2020/21 (Page 14, Money and Pensions Service Business Plan 2019/20). If a member wishes to access the pensions flexibilities, I believe that individuals should be required to positively declare that they have discussed their options with the Service or an appropriate financial adviser. While this could be considered ‘nannying’, Section 48 of the Pension Schemes Act 2015 requires the provision of Appropriate Independent Advice where a safeguarded benefit valued over £30,000 is to be transferred to access new flexibilities. We therefore already acknowledge that the ramifications of certain retirement options require great care and, considering the context in which pensions were devised (the term ‘pension’ itself derives from Middle English meaning “payment, tax, regular sum paid to retain allegiance”) it seems to follow that deviating in a manner which might leave the member unprovided for in later years should be afforded a similar degree of concern.

As the pension freedoms are exclusive to Defined Contribution arrangements which by design put the member in the path of any scheme-associated risk, you may find yourself wondering how the actual utilisation of the Money and Pensions Service or other guidance and advisory services will be of concern to those de-risking pension schemes.

Pensions are more than a legislative requirement and an employee retention tool (where the minimums required under automatic enrolment legislation are regarded as the starting block, not the finish line). Pension schemes are there to fund our retirement and where there is a risk to a member’s financial security, there is an implicit risk that the Scheme may not have achieved to what it was set up to do. This risk won’t be reflected in the audited accounts – it is a matter of integrity. We may be attuned to the world of pensions, but most will not be. Whether you are a Trustee, a Pension Manager, a Human Resources contact or an Administrator like me, I feel it is incumbent on each of us to ensure to the extent of our professional remit that members engage with those that can help them. This is not to say that subsequent member actions must reflect the advice or guidance given – consumer autonomy is fundamental – but we would challenge the notion that the need for financial advice is a minority sport and only for those with ‘considerable’ assets. Once established, we must work with the Money and Pensions Service to achieve this.

I would like to round off my piece by reiterating the principles above, which will serve us well reducing risks in the administration, provision and communication of pensions to individuals. On the administration of transfers, we must move away from a legislative limbo-dance, taking decisive action at a regulatory level to ensure we all hinder the efforts of would-be scammers. More generally, we must not allow improved systems to deprive individuals in the industry of the background knowledge fundamental to their role. Employees and employers will invest great sums into their pensions and it is only right the people who run them are intellectually invested in and can get it right. Finally, on communication, we must move away from a Monty Python-esque “nudge nudge say no more” approach and ensure that members engage with the resources provided. The industry can push for the reform of the advisory services but, if members are reluctant to use them, we find ourselves flogging a dead parrot.


Jed Newton
Pension Administrator – Willis Towers Watson