Professionalisation of trustee boards remains on the agenda as the regulator asks the industry whether they should be mandatory. James Phillips explores the latest consultation.
Trustee boards could be required to include accredited professional trustees in the near future as The Pensions Regulator (TPR) has launched a consultation on scheme governance and trusteeship, urging "badly-run" schemes to improve or consolidate.
The 30-page consultation, titled The Future of Trusteeship and Governance, is asking whether every scheme should have an accredited professional trustee, and if sole trustees can run pension schemes appropriately while managing potential conflicts of interest.
The industry is also being asked if there are barriers to consolidation and if they can be removed, and if there should be a legal requirement for trustees to meet minimum standards of knowledge, understanding, and ongoing learning.
It comes as professional trustees await the launch of a voluntary accreditation regime, run by the Pensions Management Institute (PMI). The framework will assess professional trustees against seven criteria pulled together by the regulator-backed Professional Trustee Standards Working Group (PTSWG).
TPR executive director of regulatory policy, analysis and advice David Fairs explained: "We believe all savers should be in well-run schemes that deliver good value. This paper outlines how we are considering changing the way we regulate to achieve that.
"The trustee model isn't broken, but it does need to be greatly improved. There is stark evidence that the current system doesn't work for all and there is a clear disparity between the experience of savers in well-run and badly-run schemes. If trustees cannot meet the standards we expect, we believe they should wind up and consolidate savers into a better-run scheme."
Yet, during a panel discussion at Pensions and Benefits UK last month, the audience roundly rejected the idea of it being mandatory to have a professional trustee on every board.
At a vote at the beginning of the session, just a handful of audience members supported this idea but this dwindled to just three people by the end of the debate.
Association of Member Nominated Trustees co-chair David Weeks said professional trustees should not simply receive such universal protection.
"The prime role of trustees is to look after the interests of the beneficiaries of the scheme," he said. "It is important that protective measures should be seen to protect the scheme members and not used as a job protection scheme for people who put themselves up as professional trustees."
And Capital Cranfield client director Peter Thompson, who himself is also a professional trustee, disputed the need for this to be mandatory, noting small schemes may struggle to get the best standard of trustee.
Speaking in a personal capacity, he said: "If a professional trustee opportunity comes up on a big scheme, those of you who are involved will know that we fight like ferrets in a sack over that. Whereas, if a small scheme comes up, it actually can be quite difficult to fill a vacancy for a professional trustee."
For this reason, he believes the most likely outcome - especially where there is a weak employer unable to get the scheme to buyout - is a move to consolidation, the same point the regulator has made.
"Where can you get the professional trustees from and how are you going to ensure that they are of the right calibre and the right standard to deal with the problems that these small schemes have and will probably continue to have?" he asked.
Skills more important
Sackers partner Peter Murphy argued it was not the presence of professional trustees on a board that was important, but the skills and knowledge that they bring.
"It's about appropriate competencies for the individual circumstances," he said.
"You might well have a small scheme that is actually going through a fairly benign phase of its existence, in which case you might not need to have huge technical skills on the trustee board. It might be that there is a particularly challenging environment, in which case a professional trustee can add a lot of value potentially.
"It's horses for courses. With the tougher regulatory environment that we're in, and the greater expectations, while I certainly wouldn't advocate compulsory use of professional trustees, in some circumstances it could be a sensible spend of money, albeit spending that perhaps a number of employers would prefer not to pay."
But Weeks argued it was more important that general standards of governance were being brought up for all schemes, not that simply the poorest-governed schemes were wound up and consolidated.
"The problem is not the top schemes which are, by and large, well-run," he said. "The problem is the long tail of schemes where governance is not up to standard, which TPR thinks are a problem. It seems to me that we can spend too much time refining the standards at the top and not enough extending the good practice throughout the majority of the schemes."
Bearing this apparent consensus view in mind, it will be interesting to see where the regulator takes its proposals next.
But while it may be preferable to train up trustees and ensure good standards across the pool of applicants, the regulator has found that some are just unwilling to do so and are failing to engage with regulatory efforts.
Announcing the consultation, Fairs added: "Despite our work, including through initiatives like the 21st Century Trusteeship, there is still a subset of disengaged trustees who either refuse or are unable to improve standards in their schemes.
"This clearly is not fair for savers. We believe that everyone saving for a pension should be in a scheme with excellent standards of governance and which is providing good outcomes for savers."
For professional trustees, there is an ongoing programme to develop and ensure minimum standards are met. The PTSWG standards will see affected trustees expected to demonstrate compliance in areas covering fitness and propriety, professional development, behaviours and skills, and conflicts of interest. Chairpersons and sole trustees will face additional requirements.
Yet, the framework is currently set out to be voluntary - although TPR's consultation suggests this could be made mandatory if there is significant support for it.
PMI president Lesley Carline welcomed the consultation and the questions it was asking.
"Given the number of pension scheme members suffering from poor scheme governance, this consultation is very welcome," she said. "It has pulled no punches in asking the hard-hitting and provocative questions that schemes and their trustees need to answer, positing pragmatic solutions to take the industry forward.
"As we strive for ever-improving standards of governance, and look forward to the launch of the forthcoming PMI accreditation framework, we hope that many people proactively engage with this consultation to deliver better outcomes for members across the country."
TPR's consultation, which is open for 12 weeks, is also asking how diversity on pension scheme boards can be improved - an area that has been creeping up the agenda for a while.
But there is concern that diversity would actually be damaged by making professional trustees mandatory for all boards.
For example, Hymans Robertson head of governance consulting Laura Andrikopoulos suggested professional trustees cannot be added at the expense of lay trustees.
"While the merits of the new accreditation regime for professional trustees are as yet untested, in our experience many boards do benefit from having a professional trustee," she said. "They are able to bring wider market knowledge and a greater level of in-depth expertise to pension scheme trusteeship.
"The diversity that comes from the additional lay members on the board, however, is also valuable."
The consultation will close to responses on 24 September.
Key questions from the consultation
1) Should there be a legislative change for trustees to demonstrate how they have acquired a minimum level of trustee knowledge and understanding (TKU)?
2) Should there be a legislative change to introduce a minimum level of ongoing learning for all trustees?
3) Do you agree there should be higher expectations on TKU levels of professional trustees?
4) Should schemes to be required to report to TPR on what actions they are taking to ensure diversity on boards?
5) Should it be mandatory for schemes to appoint a professional trustee?
6) Do sole trustees effectively manage potential conflicts of interest with the employers who appointed them?
7) Should governance standards for sole trustees be strengthened, for example by requiring two or more trustees to attend meetings?
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