The regulator is considering a number of ways to raise governance standards and ensure trustees are fit for purpose in the 21st century. Stephanie Baxter looks at what the industry makes of it all.
- TPR is exploring various ways to improve trusteeship and scheme governance
- Industry believes trustee boards should be more diverse, dedicated, and accountable
- Action should be taken on professional trustees who have no barriers to entry
Trustees are dealing with more challenges than ever before, from navigating the huge regulatory changes in defined contribution (DC), or coping with deteriorating funding levels in defined benefit (DB). In a year where we have seen pension issues become disasters such as British Home Stores, clearly the scrutiny over trustees and how they govern schemes is not going to fade any time soon.
The Pensions Regulator's (TPR) chief executive Lesley Titcomb has talked on many occasions about raising standards of governance and ensuring trustees are fit for purpose in the 21st century. The watchdog asked the industry how this could be achieved in a discussion paper that ended for consultation on 9 September.
Before considering what action should be taken, it is important to have a grasp of what a 21st century trustee should actually look like.
BESTrustees chairman Alan Pickering says: "Even though trusteeship is six centuries old, we can make it fit in the 21st century. The challenges have changed tremendously and that's why we really want good quality people serving on our trustee boards and people drawn from a variety of backgrounds so we drive out groupthink."
Pensions and Lifetime Savings Association (PLSA) policy lead for stewardship and corporate governance Luke Hildyard believes 21st century trustees should be more diverse, dedicated, and accountable.
"The collective capacity of the board is very important. They should be diverse in backgrounds, skill-sets and demographics. Around 83% of trustees are male; hopefully they will be less overwhelmingly male in future."
TPR's research highlighted the varying levels of time commitments that trustees contribute to different types of schemes.
"Committing time to trustee duties and also developing skills through training and other process are important," says Hildyard.
The regulator's research last year revealed half of schemes with non-professional trustees did not believe all of these trustees had the requisite level of knowledge and understanding. So what should be done to help trustees up their game?
Hildyard says the PLSA has no issue with the quality of guidance but the issue is "there's a lot of it and people aren't always aware of it."
It supports compulsory completion of the trustee toolkit within six months, but cautions against anything that makes it seem this is sufficient to qualify as a trustee.
Also, a six-month probation period could be misleading. It should be possible to remove under-performing or uncommitted trustees at any time, not just during their first six months, said the PLSA.
The Association of Member-Nominated Trustees (AMNT) says its members would support the requirement, provided it was not applied, either in theory or practice, only to MNTs and MNDs. Also, provided the standard of knowledge initially required was not raised so as to risk narrowing the range of participants that the best schemes now have.
Pickering believes ongoing training is much more important than upfront training, and suggests new components to be added to the toolkit syllabus.
"These components should be about managing sub-contractors, managing contracts, and transferring modern business acumen from the world of business to the world of pensions. The real danger is we look at pension scheme governance in a vacuum; it's but one form of governance in Britain, and we can all compare and contrast between those governance bodies that run businesses and schools etc."
Many respondents said trustee boards should have a process and framework for reviewing the competence and effectiveness of its members.
It seems the two main reasons why trustees do not complete the toolkit are either that they do not realise the importance of doing so or do not have the time.
Under Section 58 of the Employment Rights Act 1996, trustees have the right to time off to carry out their trustee duties and complete training. However, it does not specify that any of the time must be paid and fails to give any minimum time or any guidance as to the scope of the right.
The AMNT says this often leaves trustees having to argue the justification for every commitment they make to training, particularly ongoing training.
"By appearing to presume that fitting in trustee duties is unproblematic, and not engaging with scheme sponsors on this matter, TPR is missing a trick; it could be mounting a campaign to impress on sponsors why it is in their interests that their pension scheme trustees are appropriately trained," it says.
Despite the toolkit and training being extremely important, they are not a panacea and do not necessarily guarantee good trustees.
Pickering says: "What worried me at the end of the 20th century is that we felt if only trustees had more technical knowledge, they would be able to do their job better. That assumes trustees are executive officers, but they are actually non-executive governors. They need some technical knowledge to supervise rather than having to do it."
Instead, he believes the way to improve trusteeship is to focus on board dynamics, composition and effectiveness rather than, for example, "trying to educate a trustee on how to conjugate a guaranteed minimum pension".
He also warns against making non-professional trusteeship dependent on passing an exam.
"In all forms of governance we're trying to avoid group think, and if you make all trustees sit the same exam, the danger is you end up with a homogenous board comprising middle-aged technically qualified men who may not know much else other than what they've been tested on."
Rather, diversity "helps to leverage the punching power of the trustee board."
One way forward could be to raise the bar for chairpersons, whose role is considered to be incredibly important in leading trustee boards and supporting the other trustees.
PTL urges the regulator to consider measures such as disclosure of the chairperson's name in the scheme return and annual report and a minimum requirement to complete the trustee toolkit and the Pensions Management Institute (PMI) trustee exam. Also, they should be independent of the sponsor and TPR should produce or endorse guidance on what makes a good chairperson.
The PMI agrees with using scheme return information to assess performance, but does not think chairpersons should be required to achieve specific qualifications or be members of specific professional bodies.
"We do not see that there is a necessary correlation between the skills associated with being an effective chairperson and membership of a professional body," The response said.
It also called for the requirement for DC schemes to appoint a chairperson and report on compliance with governance standards to be mirrored in DB.
However, while AMNT says its members would support this, there is "some concern it might be a fruitless addition to a pile of reports that do little more than gather dust".
"The purpose must be in part to concentrate the mind of the chairperson on governance; but if that role is to be fulfilled, a way must be found to see that schemes do not pay somebody else to write it and stick it in front of the chairperson for her/him to sign without digesting it," the body says.
There is generally widespread agreement that there should be a quality framework or code for professional trustees, who have no barriers to entry despite their increasing prominence. PLSA research found the number of schemes using a professional trustee rose from 44% in 2010 to 58% in 2015.
While many do a very good job, a system where anyone can call themselves a professional trustee is clearly inadequate. Opinions differ on what a framework should look like, but there is widespread agreement that the trustee knowledge and understanding training is not sufficient for professional status. Indeed, their standards should be set at a higher level than those required of trustees generally.
Dalriada Trustees says it is essential for both the provider and purchaser that the professional expectations, and therefore legal duty of care, are properly defined. "Professional trustees should be required to evidence an advanced level of industry knowledge, experience and operate within a professional code."
PTL believes they should hold a relevant and current qualification, demonstrate they pass a capital adequacy test and have indemnity insurance, operate a peer review mechanism, and submit themselves to an Audit Assurance Framework.
The regulator could even consider creating a list of professional trustees who fulfil the criteria, which would make it a lot easier for buyers to find the right people.
These are just some of the many points raised by the industry; TPR will now consider these arguments to decide the best way forward. Any action points to drive up governance standards must help trustees to flourish and not just turn into a tick box exercise. The better the governance, the less need there should be for costly and burdensome regulation.
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