If a system of governance isn’t effective, what’s the point?

The role of the trustee board is fundamentally straightforward: pay the right benefits to the right members at the right time. To meet these key performance indicators (KPIs), trustees need a system of governance in place and if any element of the system isn’t effective, the risk of KPI failure is enabled.

Previously, trustees had to establish and operate internal controls which were adequate (not even good) for the administration and management of the scheme and the safe custody and security of the assets. Now, trustees must establish and operate an effective system of governance (ESoG) including internal controls, which must be proportionate to the size, nature, scale and complexity of the activities of the scheme.

So, what’s an ESoG?

Firstly let’s look at what an ESoG isn’t. A gap analysis, the best Risk Register ever, and a list of written policies, don’t in themselves make an ESoG. A remuneration policy covering the procurement, compensation, appointment term and performance assessment of your advisers should tick a compliance box, but the effectiveness lies in using the tools to meet your KPIs.

Effectively applying proportionality can be a challenge for lay trustees. Typically, they will serve on one trustee board, so can’t place their scheme in context. Yes, professional trustees can help here and we are already seeing trustee boards seeking our assistance. However, with any recommendation you receive from your advisers, one key question can help with proportionality: how does this benefit my members? A question which brings us right back to our KPIs.

For the own risk assessment (ORA), trustees must establish how they’ll assess the effectiveness of their risk-management system. If undertaking a gap analysis is part of your assessment, then it has merit. If not, it’s a questionable expense. Your next questions are how do you apply proportionality to your gap analysis and what are you going to do about the gaps identified?

The good news is unlike, for example, an MOT, you can’t fail an ORA. However, to evidence an EsoG you’ll need to improve any unsatisfactory areas of governance identified. If subsequent ORAs evidence no improvement in the system of governance, they’ll indicate one important point – that the trustee board isn’t effective. This may be an insight into The Pension Regulator (TPR’s) indicated preference for an annual ORA, rather than at intervals of not more than three years, as stated in the legislation.

How do you evidence effectiveness?

Aside from maintaining your KPIs, stress testing your system of governance and contingency plans will help. A simulated cyber security breach can be quite fun without a policy and response process in place, but ideally you need to stress test the policy and procedures.

Don’t underestimate the time and work required. In TPR’s words: “The ORA is a substantial process, and the governing body [trustee board] may need to expand its risk assessments to fulfil our expectations.”

I argue that the ORA itself isn’t necessarily a substantial process. Get your systems right and the ORA should be a push button process, reporting your evaluation of your system of governance. The hard work will be establishing the framework from which the report is produced when the button is pushed.

Your advisers can help, but are limited to their areas of expertise. Professional trustees see the whole system of governance across a number of schemes; we help prevent conflicts of interest and assist the trustee board with TKU. Most importantly, professional trustees approach the system of governance from a trustees’ perspective.

First published in Pensions Age magazine April 2022