Only a quarter of pension trustee boards are independently reviewing their scheme’s governance, despite this being proposed in forthcoming regulation from The Pensions Regulator.
A report, by Willis Towers Watson suggests the industry has some way to go in order to meet TPR’s proposed list of governance expectations. Its new combined code — which is currently subject to consultation — is expected to require all schemes with 100 or more members to carry out an assessment of their risk, governance and effectiveness practices at least annually. It will also require schemes to appoint an independent reviewer of their governance and risk management practices.
But this trustee governance survey reveals that only half of trustee boards currently review their effectiveness annually, and just over a quarter (29 per cent) use some form of external validation.
Jenny Gibbons, pensions governance lead at Willis Towers Watson, says: “We know that better governance leads to better outcomes – for schemes, sponsors and members – and it is better to start this process now, rather than wait for the combined code to make it mandatory.”
The survey showed most trustees feel their board performed well against the governance and logistical challenges over the last year – with around 80 per cent reporting good engagement in meetings and appropriate contingency plans. Over 90 per cent were comfortable with the responsiveness of the trustee board to urgent issues over this challenging period; a real-life test of continuity planning.
Furthermore, technology is beginning to come of age for pension scheme trustee boards – 85 per cent of respondents felt well supported by technology during and in-between meetings throughout the pandemic. There is also evidence that the use of technology is beginning to shift from ‘monitoring and tracking’ (54 per cent) to automated triggers that aid decision making (56 per cent); a forward-looking approach.
The survey reveals that, for many schemes, independent professional trustees (IPTs) have also had an important impact in improving governance and effective decision making. A total of 73 per cent of respondents said the role of trustee has significantly more risk attached to it now, and 65 per cent say their role as trustee has become more difficult.
The survey goes further, validating the value IPTs bring to their schemes, with 88 per cent of those schemes that have an independent professional trustee asserting that all schemes should have one.
Gibbons says: “It is clear that the presence of an IPT reduces other trustees’ concerns about the complexity and risk of running DB and DC schemes due to their expertise and knowledge of other schemes and market practices.”
The trend is likely to continue with nearly three-quarters of corporate sponsors predicting that the number of IPTs will continue to grow, while a third think they will see many trustee boards eventually being replaced by a sole trustee. The report shows that one-in-10 schemes have reviewed the sole trustee model of governance within the last 12 months.
Bringing IPTs onto boards may also solve a more immediate problem, as two-thirds of schemes report that it is becoming harder to find members to act as trustees.
The report also found that seven out of 10 trustees are aware that a lack of diversity is one of the key challenges facing the industry. And while over half (54 per cent) feel that their own trustee board is sufficiently diverse in terms of life experience, only a quarter (28 per cent) can say the same for diversity by age, gender and ethnicity.
However only a minority (21 per cent) are actively targeting this as a key priority which should be addressed over the next three years.
Looking to the future, the report finds that the biggest change to scheme governance is expected by participants to be an increased focus on Environmental, Social and Governance (ESG) factors (44 per cent) and assessing the impact of climate change on pension schemes (39 per cent).
“Trustees hoping for a breather after the challenges of 2020 and early 2021, and even those whose DB funding levels have seen sustained improvements, will in fact continue to have to work apace with new roles, structures and improvements to assimilate under the new Combined Code,” says Gibbons.
“The trick for trustees and sponsors will be to make those improvements work for them; to bring about the best outcomes for their scheme’s specific structures and requirements.”
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