The Pensions Regulator (TPR) has launched a consultation on the future of trusteeship and governance, which closes on 24 September. The proposals cover trustee knowledge and understanding, diversity on trustee boards, the role of professional trustees and sole trusteeship. The overarching theme is one of improving governance standards and TPR has a clear message for trustees of underperforming defined contribution (DC) schemes; improve or consolidate.
All my sins
The 21st century trusteeship campaign was an important first step on the road to better governance, but we all know how hard it is to connect with trustees who are not already engaged and motivated. This is particularly true of DC schemes with less than 100 members. TPR’s 2019 DC survey showed that less than 5% of these schemes are meeting all TPR’s key governance requirements, with over half meeting none of them.
How do you know if your scheme is meeting TPR’s governance requirements? Try asking yourself these questions:
• Have you recently assessed the knowledge and competencies of the trustees?
• How difficult was it to explain the trustees’ assessment of value for members in the latest chair’s statement?
• Have you assessed the effectiveness of the scheme’s internal controls for financial transactions?
• When was the default investment strategy last reviewed?
TPR’s research suggests that many trustees of smaller schemes think they are doing a good job, with more value placed on ‘the personal touch’ than on meeting governance standards. It can be tempting to dismiss this as bureaucratic box-ticking, but TPR’s real concern is that poor governance leads to poor member outcomes.
David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at TPR, published a remarkably frank blog alongside the consultation, in which he says: ‘Bad governance means [DC] savers will have less money in their pots for retirement. Is that fair? No.’ However well a trustee knows their members, it is difficult to argue with that.
Slings and arrows
TPR are setting their sights on schemes that are missing governance targets. They plan to dig deeper into the running of these schemes, asking specific and direct questions to identify which schemes are not being run properly.
TPR are considering ways to help schemes improve their governance, including simplifying the TKU guidance. However, TPR are clearly taking a tougher stance and we should expect to see more trustees being fined where regulations are being breached.
Fly to others
Where schemes are either unable or unwilling to meet the required standards, TPR will encourage the trustees to wind up the scheme and transfer members to either an authorised master trust or another suitable arrangement. TPR’s view is that larger arrangements such as these benefit from economies of scale and generally have higher governance standards than the average scheme.
A sea of troubles
The increasing pressure from TPR could leave some trustees with a difficult choice. Find the time and resources needed to bring the scheme’s governance up to scratch, or hand over control to a larger arrangement that may deliver better outcomes for members? That, ultimately, is the question.
Senior Consultant – Aon
Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Aon Hewitt Limited Registered in England No. 4396810 Registered office: The Aon Centre, 122 Leadenhall Street, London, EC3V 4AN