At a glance
- Molly McCarthy won the PMI’s fifth student essay competition with her article on the benefits of further diversifying trustee boards and other governance bodies in pensions
- McCarthy is currently an associate within the pensions management consulting team at PwC
- The two runners up were Willis Towers Watson senior pension administrator Jed Newton and XPS Pensions Group senior administrator Camilla O'Brien
Molly McCarthy looks at the steps the industry can take to further improve the diversity of governance bodies?
In a blog on the Sackers' website last July, the law firm's associate Emily Rowley characterised diversity as questioning whether a board is representative of its membership and if it consists of diverse skills, approaches to decision-making and perspectives. The Pensions and Lifetime Savings Association's guide, Diversity & Inclusion Made Simple, indicated that 83% of trustees are male, and 2.5% are under 25 years old compared to one-third who are are over 60 years of age. These figures demonstrate that boards are likely not meeting those two key criteria.
Cross-industry research indicates that having a diverse board leads to better decision-making, achieving results in less time, better profitability and more innovative solutions. The first half of this essay will borrow Rowley's two key criteria to explore the benefits of further diversifying trustee boards and other governance bodies.
In its report, The Engagement Deficit, ShareAction states that a more diverse board and their "collective life experiences" will improve their capacity to understand the unique challenges faced by scheme members.
There are unique challenges faced by some demographics and not others, many of which are under-represented across trustee boards. These may in turn become blind spots within decision-making. I conducted my own research into how culture and family background impacts attitudes to retirement provision. It resulted in a spectrum of responses spanning lack of transferable knowledge, wariness against mistakes, emphasis on saving, lack of clarity of the UK system for those from other countries, the need to provide for previous generations and so on. The potential for variability across a whole scheme profile is huge. Having understanding of what is important to members and how their own decision-making is influenced can help tailor communications, training and improve engagement.
A pertinent example is the industry shift towards digital - particularly online member communications and the pensions dashboard project - to improve transparency and ease of access. Consideration should then be given to those that have disabilities, neurodiversity or lack of resources, those who may struggle to access and understand information in this format. Having a further diversified board would identify potential problems, provide challenge and facilitate discussion early on, ultimately saving time and costs by avoiding backtracking later. This will mitigate against blind spots, highlight potential missed opportunities, create new solutions and further gain the confidence of members by showing them that they have been thought about. Being able to engage with members and earn their trust is a mutually beneficial result.
Covid-19 emphasises the importance of innovative solutions and individual experience. A board from a similar background and status may have vastly different experiences to the majority of the population. Additionally, the ability to work together virtually has broken down previous obstructions like geography, expenses, time commitment and access. Evolving pensions legislation and regulation has shown the need to adapt and react. Legislation and regulation to better improve the breadth and depth of retirement provision and the numbers participating, notably auto-enrolment and flexible drawdown, would be greatly helped by the empowerment of diverse trustee boards to reflect and respond to their diverse membership.
Diversity of skills and perspectives
The Pensions Regulator's (TPR's) consultation on the future of trusteeship and governance showed that trustees prefer recruitment to be based primarily on skills and competence. These ‘skills' should be expanded. One example is the ability to identify and challenge unconscious biases within an appropriate context. An understanding of how social media and an online presence can be harnessed could be a great competency. People with diverse backgrounds can offer unique oversight and foresight of issues affecting others and having a radar attuned to wider issues and contexts is a beneficial skill to bring to a board where the norm often dominates discussion. For example, home ownership has long been the norm but long-term renting is on the rise, meaning people retain large payments into retirement and cannot rely on a property like others have.
A diversified board with different assumptions and attitudes helps to broaden discussions which can help spot new opportunities in areas like communications, the use of technology, the style of investing and so-on. Basing trustee recruitment on a traditional set of criteria exemplifies the issue that the existing assumptions are limited. Similarly, age and experience does not necessarily mean appropriately skilled. By opening opportunities earlier on, it enables skills to be improved and expanded over time, individuals can observe others and have regular practice, resulting in a pool of more experienced trustees much quicker.
Ultimately, members are more likely to engage with a scheme that they can identify with. Better engagement can lead to better data quality, greater compliance, better satisfaction and willingness to work together. The research speaks of the quantifiable benefits of diversity (namely costs and time saving). This essay has also explored benefits of a personal nature critical for retirement and pension planning (greater transparency, empathy, consideration).
The second half of this essay will focus on steps that could be taken. These can be separated into four broad categories of recruitment, retention, consultation and requirements.
Care should be taken to actively engage a diverse pool of applicants and ensure the process for recruitment does not have significant barriers. Steps should include:
● Appropriate advertisement of the role - ensuring that applicants feel empowered to apply even without extensive specific experience and promote the relevance of wider skills and competencies, emphasising ongoing development and training.
● Ensure that location and time are not obstacles to applying - offering remote and flexible options, avoiding times difficult for people with caring responsibilities.
● Expand the recruitment process to allow candidates to demonstrate wider skills and competencies - using psychometric testing, mock board meetings and alternative interview structures help showcase candidates suitability beyond traditional methods.
● Broadening the diversity of selection panels - allowing candidates who may feel inexperienced or isolated to feel more comfortable voicing their opinion.
● Using talent pools - keeping past candidates on record or having a wider cross-industry talent pool can mean that the recruitment process is a learning process with recurrent opportunities, so that those initially unsuccessful do not feel discouraged from pursuing a role.
There has been a shift in recognising that increasing diversity means nothing if you cannot create an environment that encourages, facilitates and retains diverse talent. Overhauling recruitment processes to ensure that board composition is more diverse is futile if those recruited do not feel comfortable providing their opinion and challenge in meetings. Boards should review their meeting conduct so that they are not requiring participants to fit a certain mould. This could mean submitting suggestions and ideas prior to the meeting, using smaller breakout discussions to build confidence and ensuring there is ample opportunity to hear from everyone. If meetings continue to be virtual or a hybrid, this will be important so not to disadvantage those absent from the room. The chair will be crucial in ensuring that these methods are implemented effectively and that individuals feel their contribution is valuable.
The formal setting of a boardroom can be intimidating, particularly for an individual if they feel they lack experience comparatively to others. Developing relationships outside of the board room lessens that intimidation and can help create a sense of collective responsibility. Confidence can also be built through regular and evolving training, which should expand to soft skills, topics like ESG, unconscious bias, confidence to challenge and so on, so that people feel equipped for meetings. Boards and the industry could consider a coaching initiative both upward and downward so that trustees can be matched with a mentor whom they can share experience and act as a sounding board for each other.
Regular monitoring to understand gaps in knowledge or confidence can aid regulators and educational bodies to develop relevant content, show common blind spots and highlight topical issues for conferences and initiatives. This could be integrated within the coaching/buddy model. As part of this regular review, mobility and turnover could also play a key role. Pools and higher turnover of trustees with more mobility means greater exposure to a wide variety of schemes and boards, expanding the individual and scheme's experience. This can also go some way to create a sense of freshness regularly so that boards are continually evolving and changing to accommodate diversity. Attention has also been brought to remuneration of trustees, and recruitment of a more diverse board may highlight the need for greater consideration of how individuals are compensated so that they are retained.
Boards cannot feasibly cover all individual circumstances all the time which is why consultation within schemes and across industry can help determine priorities. Collecting quantitative diversity and inclusion (D&I) data on scheme membership can help to visualise the scheme profile identifying any gaps in representation of which to rectify or seek external support on. Qualitative techniques like focus groups or pulse surveys, can show further detail on issues members are facing and thinking about. Once trustees have an understanding of their membership, they could create a checklist of questions to think about when decision-making. These questions can then be run through with each decision to ensure that the impact has been weighed up in different contexts and trustees can pre-empt any actions required as a result. Once boards have an understanding of their own scheme, they will require the support of the industry to fill gaps and take further action. Examples follow of wider industry collaboration:
● Boards cannot recruit candidates that do not exist so more needs to be done to show and explain these opportunities and the benefits of these roles for individuals.
● Cross industry conferences can better represent issues facing members and schemes by consulting with them to understand prevalent and prominent topics. Conferences should highlight more diverse voices to encourage conversation and empower individuals. Specific conferences should be created to focus on increasing diversity and inclusion to provide an adequate forum for idea generation and sharing, so that D&I does not just become an add-on to an existing event.
● Networks and partnerships help to facilitate collaboration. Existing networks like Young Trustees Network, Women in Finance Charter and NextGen help to advocate for different groups, share knowledge, organise initiatives and help advance representation. The regulator and policy making bodies should consult these networks to understand how they can work together to support diversifying boards. Similarly, pension professionals and their firms would benefit from partnering with these networks to host talks and sessions to share learnings.
● Pensions ambassadors / a diverse independent body - a diverse group of individuals from across the industry which can be called upon to consult and support where appropriate. For example, a trustee board struggling to have a more diverse interview panel alone can access the committee to fill the gap. This group could be called upon to discuss different changes, policies and issues across the pensions industry to have greater oversight and foresight. The existing working group goes somewhat to achieving this.
A lot of the debate on diversity has considered formal requirements, typically quotas and reporting. From previous consultations, including TPR's work on the future of trusteeship and governance, it has shown that mandated reporting is unpopular with trustees who feel this can lead to unhelpful comparison, greater scrutiny which creates greater administration burden and actually becomes a deterrent. Similar claims likely surfaced around the introduction of gender pay gap reporting, and that has since shown to provoke real action. TPR and the industry should spearhead efforts to persuade boards. Further requirements for defined contribution schemes to include trustees voting behaviour, understanding how wider issues were discussed and if consideration was made for the diversity of scheme membership could be integrated to provide greater transparency.
By creating definitions, guidance and tools, boards have greater understanding of best practice and case studies to take ideas from, discuss and use to engage their own membership. With the next generation of pension professionals, the conversation continues to build and create a landscape whereby members, employers and trustees have comprehensive, articulate and realistic expectations. Ultimately these efforts will require participation, collaboration and commitment from across the industry but hopefully this essay has shown that it is a worthwhile endeavour.
Molly McCarthy is an associate within the pensions management consulting team at PwC