21st Century Trusteeship and Governance – Sackers’ response to consultation
As part of its work to examine how trustee boards can meet the challenge of pension scheme governance in the 21st Century, TPR issued a discussion paper on 22 July 2016, setting out what it is doing to educate and support trustees of both DC and DB schemes. Drawing on the findings of its research in a number of key areas, TPR is also looking at what more it and the wider pensions industry can do to raise standards of trusteeship.
In this response
- General comments
- Board effectiveness and diversity
- The role of the chair
- Meeting the TKU standards and the role of training and development
- Managing conflicts of interest
- Engaging with key governance activities and working with third parties
- Small schemes
- Concluding remarks
We welcome the opportunity to contribute to the discussion on the governance challenges facing trustees in the light of increasing legislation and regulation for pension schemes.
In its work to improve levels of pension scheme governance, we appreciate the efforts by TPR to assist trustees by way of education and support. In our view, it is this support which is fundamental to driving up governance standards. A balance needs to be struck between measures needed to achieve the necessary standards of good governance and measures which might operate as barriers to trusteeship.
In our experience, larger schemes already generally tend to achieve high standards of governance. By contrast, and as TPR has identified in its research, some smaller schemes (which may be less well resourced), can struggle to achieve the same levels of good practice in all areas. With this in mind, one model of governance is not appropriate for all schemes and we welcome TPR’s efforts to tailor its tools and products to different situations – scheme size being a key factor to take into account.
Among other things, the discussion paper suggests the use of overarching guidance which covers issues that are common to all schemes, with more specific issues being covered in technical guidance. In particular, bite sized chunks of information make it easier to assimilate new learning, as does the use of practical worked examples. This approach has worked well with the recent update of the DC code and associated guidance.
Barriers to entry
The discussion paper considers whether standards of pension scheme governance might be improved by the introduction of certain “barriers” to entry, such as exams in trusteeship, either for professional trustees or for all trustees.
In our experience, the ability to pass theoretical exams does not necessarily translate into the skills needed for effective trusteeship. The skills required are often practical, and ones that are grounded in experience – there are likely to be limits on the extent to which these can be taught and tested effectively without experiencing and managing them in practice. Qualifications may risk putting off capable individuals who have, or who could attain, appropriate skills through on the job training, without achieving results that would otherwise compensate for the loss of potentially good trustees.
We note TPR’s research finding that three in four schemes that had recruited a member nominated trustee (MNT) in the last 12 months reported finding it relatively easy to find a suitable candidate. This is not always our experience in practice. We find that the ease with which MNTs are recruited can depend on a number of factors. By way of example, the status of the scheme in question can play a part – closed schemes in particular can find it more difficult to recruit MNTs.
As TPR acknowledges, we also find that a healthy mix of skills and backgrounds can contribute to an effective trustee board and that the ability to draw on a range of skills and different roles within the employer’s business is important. A longstanding knowledge and understanding of the history of an employer’s business can also be key to helping a trustee board work in a manner that is consistent with trustee duties, and collaboratively and constructively with the employer on issues such as scheme funding.
For lay trustees, a need to achieve new qualifications is likely to put people from all parts of a business off joining a trustee board. For example, senior executives may lack time, whilst others may lack experience of taking exams.
We consider that the introduction of barriers could reduce the likelihood of trustee boards attracting a broad range of individuals with different and relevant skills, to the ultimate detriment those boards.
Could there be a focus on the importance of the need to consider individual skill sets and in-role training, rather than on exams? This could be achieved through guidance and/or a toolkit module.
Under the Trustee Act 2000, individuals acting as trustees “in the course of a business or profession” are already required to meet a higher duty of care and demonstrate a greater level of knowledge and understanding than trustees who are not acting in such a capacity.
In practice, it may not always be clear when someone is acting in a professional trustee capacity. At one end of the spectrum, it will be generally clear when individuals or firms are marketing themselves as professional trustees. Similarly, at the other end, a lay MNT who is not paid for his or her services as trustee is unlikely to be a professional. But for others, the position may be less clear cut. For example, it is relatively common for retired senior managers to take on the role of trustee or committee chair and get paid for this. Whether they are to be considered professional trustees within the Trustee Act definition will depend on a number of factors in each case.
To help individuals who may not obviously fall in either the professional or lay trustee camps, guidance from TPR as to when a trustee may be deemed “professional” would be helpful. Furthermore, in addition to TPR’s statutory register of independent trustees, a register of trustees who hold themselves out as professional trustees could help provide clarity, as well as a tool to help those looking to appoint a professional trustee to a board.
The discussion paper also asks whether all professional trustees should be required to be registered by a professional body. Pension scheme trustees, both professional and lay, are already regulated by TPR, which has a number of powers in relation to them. It is not clear what adherence to a professional body would add to the protections already in place.
We agree that the role of chair of trustees requires good leadership skills, together with communication, negotiation, people management and mentoring skills, all in addition to pensions knowledge. These are some of the key skills needed to ensure that meetings and trustee business are carried out to a high standard and in a timely manner. Whilst increasingly, the role of chair is fulfilled by experienced professional trustees, it is also commonly, and successfully, undertaken by individuals from within the sponsoring organisation. As such, we do not consider that pensions qualifications or membership of a professional body would automatically lead to raised standards of trustee chairmanship.
Reporting on compliance
The discussion paper asks whether the requirement to appoint a chair and report on compliance with governance standards should be introduced for DB schemes as it has been for DC.
For DC schemes, this requirement was introduced as part of a package of measures designed to improve governance, with the aim of better protecting members who bear the risk in such schemes. DB schemes are already subject to a number of formal reporting and governance requirements, for example, the requirement to produce an annual funding statement, the need to prepare and regularly review their statement of investment principles, and the requirement to submit annual returns. In addition, TPR has various powers and tools at its disposal to require compliance where standards of governance fall short. As such, we would question whether the addition of new reporting requirements would have a significant, if any, impact on governance standards in DB schemes.
New trustees – getting up to speed
In our experience, the process for appointing trustees generally tends to be thorough, often using member communications that outline the skill sets that are required, the need to undertake training and the time commitment involved. The selection process often includes interviews and selection panels. New trustees must then attain the level of knowledge and understanding needed to enable them to carry out their duties within six months of their appointment. In the event that trustees are underperforming, TPR has powers to issue improvement notices or to remove trustees in certain circumstances. Adding to this a requirement for new trustees to complete a probationary period is, in our view, likely to be superfluous.
In terms of maintaining skills, the discussion paper suggests using a more formal approach, such as a Continuous Professional Development (CPD) framework, to help ensure that training governance is better embedded in board operations and that trustees undertake the training they need.
We agree that CPD programmes can be helpful in ensuring that skills are regularly refreshed and knowledge kept up-to-date with recent developments. A CPD programme for trustees could also be usefully supported by a coordinator on the trustee board – perhaps by the chair of trustees or secretary to the board – who helps keep track of training completed, whilst looking ahead to training that may be needed to help trustees with future projects.
Practical training which is targeted to a particular event, for example a scheme’s triennial valuation, can be particularly effective. It can help to ensure that trustees’ TKU is both up-to-date and relevant to the task at hand. Where such training is undertaken by the board as a whole, it can also help the group work together efficiently towards the successful conclusion of a task or project.
Although trustee training is available from many sources, some schemes may struggle to find good and cost-effective training. It would therefore be helpful if TPR could note in its guidance that, in addition to the Trustee toolkit, there are other training providers (and listing some examples, such as the PLSA and others), much of which is available free of charge.
TPR’s guidance on managing conflicts of interest already provides detailed education support for trustees (and employers) on addressing conflicts of interest.
Care needs to be taken to ensure that, in seeking to reduce the likelihood of conflicts arising, schemes do not leave themselves under resourced, for example, as a result of individuals standing down due to concern about conflicts where the likelihood of a conflict arising is, in fact, remote. Given the need for cooperation between trustees and sponsoring employers, as well as understanding of each other’s objectives, a certain degree of overlap can assist in working towards common goals where interests can be aligned.
What is important is that each individual on a trustee board has a good awareness and understanding of their role and duties, as well as the types of situation in which conflicts can arise. In addition, trustees and employers need to be alert to conflict issues and aware of how to avoid conflicts arising. They also need to have in place a plan for managing any conflicts accordingly.
We see a wide range of challenges for trustees in relation to engagement with providers and others and it would be helpful for guidance on this issue to broken down into the distinct elements identified by TPR in the discussion paper. These include: administration and service level agreements; investment governance, including strategy, fund performance, and monitoring; and working with advisers, including appointment, negotiating fees and services, challenging advice and generally monitoring the ongoing relationship.
Good administration is clearly fundamental to pension schemes. The discussion paper observes that TPR has found many examples of schemes with good administration processes, particularly among large schemes, through, among other things, effective use of service level agreements and a high degree of interaction with administrators. This may, at least in part, be due the fact that large schemes tend to have more leverage to secure favourable terms and service levels, which in turn lead to high standards. We therefore see this as one area where smaller schemes would particularly benefit from targeted guidance and support from TPR.
That said, where there is limited leverage, there may be significant limits to what a scheme can achieve. As such, there may also be scope for TPR to work with its counterpart regulators and representative bodies, including the Financial Conduct Authority, the Investment Association and the Solicitors’ Regulation Authority, to help ensure that suitable products and terms are available to schemes of all sizes.
We agree that schemes that are not delivering on governance risk poor outcomes for members and that action may need to be taken to improve the position. As TPR identifies, the first step is to support those schemes through education and then, where necessary, enforcement powers exist to help improve schemes which are not meeting the desired standards.
The discussion paper goes on to ask whether small schemes that are unwilling or unable to comply with the prevailing governance requirements should be forced to exit the market or consolidate into large scale provision. In our view, these solutions are likely to be impracticable for a number of reasons.
Current legislation does not permit schemes to close themselves down. If wide, new powers were introduced to facilitate scheme closures in circumstances stemming from a failure to meet existing statutory and regulatory standards, there is a risk that the powers could be deliberately used to offload pension scheme responsibilities more widely.
Given the requirements of scheme funding and employer debt legislation, such a proposal appears to be unworkable for DB schemes. For DC schemes, how is it envisaged that the cost of scheme closure and transfer of members’ benefits or consolidation of multiple schemes might be met without taking the money needed to meet costs from members’ account?
As TPR notes, through its research it has already identified some schemes as needing additional support. It may be appropriate for TPR to target those schemes directly, giving specific support on a case by case basis.
As noted above, we appreciate TPR’s efforts to help schemes achieve high standards of governance through education, guidance and general support.
In all of this, it is important to ensure that governance is not treated as a one-off or even ad hoc exercise. Good governance is a continuous process for both trustees and TPR and ongoing engagement is important to ensure that high standards can be reached and maintained.
It is also important that schemes are able to tailor their governance measures and priorities to their own needs and circumstances. One size does not fit all, and effective governance is governance which enables a scheme to achieve better outcomes and to manage itself effectively.