Pensions: The future of trusteeship and governance
The Pensions Regulator (TPR) has set out plans to strengthen pension trusteeship, following a consultation on the Future of trusteeship and governance in autumn 2019. TPR is proposing a more pragmatic approach to improving Trustee Knowledge and Understanding (TKU) than initially envisaged.
In its response to the consultation, the ICAS Pensions Panel shared several ideas on how TKU could be improved and some of these are reflected in TPR’s consultation report.
TPR approached the consultation as an examination of the merits and challenges faced by traditional trust-based workplace pension schemes, particularly defined benefit (DB) schemes, and to some extent single-employer defined contribution (DC) schemes, where TPR is encouraging consolidation.
The consultation did not specifically address trusteeship and governance is relation to the DC master trust model, the main vehicle for pensions auto-enrolment. Therefore, in taking forward its final proposals TPR needs to address how these will apply to DC master trusts, as the model has features akin to retail savings vehicles.
Trustee Knowledge and Understanding
A legislative approach to TKU is not proposed.
TPR is to include updated material on TKU in a new web-based Code of Practice. It will set out TPR’s expectations for the pension trustees of private sector schemes and board members of public service schemes. The aim of safeguarding the interests of savers will remain the same but the guidance will be modernised to include new topics such as Environment, Social and Governance (ESG) considerations, including climate change.
TPR intends to simplify the way its expectations about TKU are expressed; for example, these are to be differentiated clearly by trustee role-type and by type of scheme.
The new web-based Code of Practice will consolidate all fifteen of TPR’s existing codes into a single Code of Practice. TPR intends to consult on the TKU-related content contained in this single Code of Practice in early 2021.
The ICAS Pensions Panel supports this approach.
Demonstrating TKU and ongoing learning
A formal system of Continuing Professional Development (CPD) is not to be introduced.
Instead, TPR plans to consider a range of acceptable methods of demonstrating TKU. This will include the completion of the Trustee toolkit, relevant work experience and other training. For professional trustees, industry accreditation is likely to be considered as a route for demonstrating TKU.
Once the revised TKU Code of Practice material, including accompanying guidance, is in place, TPR plans to assess progress once schemes have had time to adjust to the changes.
In its response to the consultation, the ICAS Pensions Panel expressed support for a verifiable CPD-style approach to training for all trustees, both professional and lay. However, the Panel recognises that there would be challenges to introducing an effective formal system of CPD.
The Trustee toolkit
TPR is mindful of the need for some educational material to be free to use for those newly appointed in a trustee role, including lay trustees who may have limited time and limited access to educational material.
Therefore, TPR plans to review the Trustee toolkit during 2020-21. The review will consider what changes could be made so that trustees can more easily convert learning into the practical steps needed to manage their scheme well.
The proposals for the Trustee toolkit are consistent with suggestions made by the ICAS Pensions Panel in response to the consultation.
The Panel is also keen for all schemes to have robust recruitment and induction arrangements for trustees. For lay trustees, new to the role, we would expect there to be a mechanism for ensuring that they are aware of their legal responsibilities as well of expectations around completing the Trustee toolkit and undertaking ongoing training and development activities.
Time to learn
TPR is to run a targeted campaign over the course of this year and beyond to remind employers that they have a legal duty to give employees who are trustees of their occupational pension scheme time off for their trustee role.
The legal requirements are set out in sections 58 to 60 of the Employment Rights Act 1996.
Board diversity
TPR is to establish an industry working group to assist schemes and employers to improve board diversity.
TPR has no plans at present to require schemes to report the steps they are taking to increase board diversity. Instead, TPR is to focus on raising the profile of diversity and inclusion, and the provision of related guidance
A firmer approach may follow if TPR deems there to be insufficient improvements in board diversity.
Professional trustees
TPR acknowledges that it is not currently feasible to require each pension scheme board to appoint a professional trustee, given that there is insufficient existing capacity. However, a requirement for each scheme to appoint a professional trustee may be revisited in future if the number of schemes declines as expected.
In the meantime, TPR plans to evaluate the impact of Association of Professional Pension Trustees’ (APPT’s) standards for professional trustees and the accompanying accreditation process. The APPT has announced that its accreditation process will be open to applicants from April 2020.
While it would be beneficial for every scheme to have a professional trustee, the ICAS Pensions Panel believes this may never be feasible on the grounds of cost. Therefore, it is vitally important that trustee boards demonstrate that their scheme is being managed properly in the interests of its members.
The panel would also support arrangements whereby trustees report what they have achieved on behalf of the members of the scheme rather than just what they know.
Sole trusteeship
TPR has no plans at the moment to change the way it regulates schemes that use a sole trusteeship model. This may change if evidence emerges of fundamental problems.
TPR has concerns about aspects of sole trusteeship including the effectiveness of some models in dealing with conflicts of interest and in engaging savers. Therefore, TPR intends to commission research on the scale and reach of sole trusteeship in occupational pension schemes.
The ICAS Pensions Panel made a number of suggestions in its response to consultation questions on sole trustee models. The panel believes that schemes should avoid appointing ‘sole trader’ sole corporate trustees. From a risk management perspective, risks around conflicts of interest between the employer and the trustee may be higher than in other sole trusteeship models. For example, in respect of the payment of adviser fees. In this model there is also acute reliance on the knowledge and experience of a single individual.
