In its consultation paper, The Future of Trusteeship and Governance, The Pensions Regulator (TPR) has posed a range of questions to the pensions industry on how to reduce the number of badly run schemes and improve the trustee model.
The Pensions Management Institute president, Lesley Carline described the paper as “pulling no punches in asking the hard-hitting and provocative questions that schemes and their trustees need to answer.” And one of these questions is whether a professional trustee should be required on every pensions trustee board? A ground-breaking suggestion, which has triggered debate within the pensions industry, with the case being made for both sides of the argument.
In favour …
Supporters of the idea (often professional trustees, it has to be said!) argue that professional trustees are much more likely to secure better outcomes for members as a result of their wider knowledge of the market and their understanding of what good service and good value for money looks like. They will also point to the proposed accreditation of professional trustees which, they say, will lead to higher standards of governance than is likely to be achieved by lay counterparts. And indeed, TPR’s own analysis shows that schemes with a professional trustee have higher standards of governance than those without.
Another argument is that this broader knowledge base and greater experience allows professional trustees to more easily challenge the scheme’s advisers, ensure that agendas are trustee and not adviser driven, and achieve an overall better service at a competitive cost. And in addition, proponents will say, a good professional trustee will pass on his or her knowledge and experience to the other trustees, thereby improving the scheme governance and enabling decisions to be made more quickly and efficiently.
And against …
Those standing on the other side of the fence query the additional value brought by a professional trustee, citing the valuable contributions made by lay trustees who have long-term knowledge of the sponsoring employer and the scheme, and who act with honesty and integrity. They will also point to the inevitable increase in costs incurred by those hundreds, or even thousands, of new professional trustees that would be required to fill a seat on every pensions board. There are currently nowhere near enough professional trustees to do this and, whilst there is likely to be an increase in numbers, the proposal may either spread good professional trustees too thinly or allow less knowledgeable and less experienced professional trustees to emerge.
There is also a capacity problem growing for MNTs (and even employer nominated trustees). This is due to a range of factors, the key one being that there is little or no incentive to be a MNT. The complexity of pensions legislation, the standards set by TPR for trustee knowledge and understanding, the myriad approaches to funding and investment of the pension schemes – not to mention the personal liability – all act as a huge deterrent to anyone contemplating the role of MNT.
Rock and hard place for small schemes
So, there are arguments for and against TPR’s proposal; whichever route is advocated, there are problems ahead. And either way, the schemes that are likely to suffer the most are the small / micro schemes, many of which are poorly governed already and are most in need of help. These schemes will find it very hard to encourage MNTs, given their size, and also very hard to attract professional trustees, given their financial resources and likely problems.
This is also a problem for TPR. Whilst these schemes form a relatively small portion of the pensions market in terms of members and assets, they form a large proportion of the total number of UK pension schemes. As such, they will be very difficult to individually monitor (or fine!) and so it is hard to see what can be done about them.
One possibility is consolidation, which TPR is looking into. This will bring its own host of problems, due to the wide ranges of covenants, funding levels, investments, data quality etc. A compromise might be to group small similar schemes together, perhaps with a shared Sole Professional Pension Trustee, who can achieve affordable best practice through economies of scale, and quality, technology driven processes.
Whatever is decided, I wish TPR well in its quest to reduce the number of badly run schemes. It is not going to be a quick fix, however, and I do hope it does not become a quest for the Holy Grail!
(The TPR consultation closes on 24 September 2019)