Fewer schemes that are more professional make up Pensions Regulator's vision of the future, experts say

That paper, 21st Century Trusteeship and Governance, has caused quite a stir in the pensions industry – but it is not the first sign of the regulator's proactivity. You can get a feel for the direction that the regulator has been moving in by looking at the how-to guides that were published alongside the new defined contribution (DC) code of conduct. The regulator intends to draw on those guides in creating streamlined educational materials for all types of scheme.

It is clear that trusteeship is becoming more and more challenging and demanding. New rules and regulations continue to flood in. Concerns about defined benefit (DB) deficits are creating waves. DC 'freedom and choice' has revolutionised members' retirement options, but it has also raised the spectre of mass mis-selling. The regulator is attempting to raise standards, potentially ousting smaller schemes that aren't up to scratch. Better personal skills, as well as pensions knowledge, will be required.

Fewer schemes, more professionalism

The Pensions Regulator has long been concerned about the poor governance and administration standards of some schemes. It has been openly considering whether to take steps to consolidate sub-standard schemes, pointing its accusatory finger mainly at small DC schemes. Consolidation is likely to become more common for these schemes.

Research by the regulator cited in the paper demonstrates that schemes with only professional trustees are more likely to have better governance arrangements. The proportion of schemes without a professional trustee has decreased in the last five years and the regulator is encouraging this trend, and exploring whether professional qualifications should be required. It has even suggested that trustee chairs, whether or not professional trustees, should be required to have some minimum qualifications or experience.

Detailed technical knowledge is not what makes a good trustee. Motivation and personal skills, combined with basic knowledge about pensions, are more important. Some of the regulator's proposals emphasise these soft skills, especially for trustee chairs.

However, basic knowledge still remains important and the regulator is currently exploring introducing formal training requirements.

Best practice recommendations

The DC guides contain lots of practical ideas, but these are not all specific to DC. The guides contain plenty of pointed to what the regulator is likely to roll out to all trustees shortly.

The following best practice suggestions should inspire all trustees, whether DC or DB.

Communication

Trustees should have a clear communication plan. They should explore different ways of finding out what their membership thinks including member surveys, workshops, AGMs and focus groups. They should also consider different styles and formats for groups of members with different characteristics.

Trustees should make it easy for members to update their details. They should consider using social media to keep in touch with members, as long as personal information is not disclosed in breach of data security requirements.

Third party providers

Trustees should put in place a rigorous tendering process for third-party providers, and negotiate firmly on fees and services. They should monitor performance pro-actively, and at least quarterly where possible.

Trustees should hold providers to account over quality and value for money. They should assess whether providers are suitably qualified and receive adequate training. Trustees should ask their legal advisers to check all contracts with providers.

Payments

Payments should not usually be made by cheque. Trustees should explore the use of a platform that facilitates standardised information and the electronic processing of transfers, for example Origo Options or the Altus transfer gateway.

Diversity

Trustee boards should be diverse in relation to type of trustee, experience and skills, and societal demographics – age, race, sex, age, disability and orientation.

When recruiting new trustees, the board should consider formal succession planning to fill any gaps in knowledge. The board should consider a structured induction process once new trustees have been selected. Established trustees could act as mentors to new recruits.

Professional trustees can bring valuable insight, impartiality and objectively. Where it is not practical or proportionate to include a professional trustee on the board, schemes could consider appointing or consulting with one on a temporary basis.

Knowledge and skills

Trustees should assess their knowledge, understanding and skills every year. Professional trustees can help by sharing their experience of other trustee boards. Larger schemes may wish to employ an external agency to carry out a review.

Stewardship

Trustees should consider a formal approach to investment stewardship. Some trustees may wish to agree specific voting criteria with investment managers.

Risk assessment

Trustees should be vigilant to the risk of pension scams and risks relating to cyber security threats.

Although the regulator acknowledges that trustees may be unable to establish definitively the level of protection that different scheme assets would have in the event of fraud or another adverse event, trustees should still attempt to assess the risk and consider ways of reducing it, if necessary.

Simon Tyler and Stephen Scholefield are pensions experts at Pinsent Masons, the law firm behind Out-Law.com.