Engaged Investor

Good governance is vital to all well run schemes – but it is often overlooked and neglected, leaving a scheme open to high levels of risk and the trustees potentially falling foul of the Pensions Regulator.

When it comes to paying out benefits, enhancing investment returns and running an efficient scheme, effective governance is a must – and something trustees should evaluate regularly as an integral part of their duties.

Meeting regularly, reviewing the scheme’s investment strategy, data integrity, keeping documentation up to date and correct, monitoring scheme advisers as well as keeping an eye on the strength of the covenant are just some of the key things trustees need to juggle as part of their everyday duties.

A fine balance

Steve Delo, chief executive of independent trustee firm PAN Governance and a former president of the Pensions Management Institute, says poor governance will ultimately result in scheme failure and trustees should take their risk management seriously. “Poor governance could see the scheme fall in the Pension Protection Fund (PPF), and trustees could even end up being sued by scheme members,” says Delo.

Transparency and trustee engagement are also vital when practising good governance and all trustee boards should be looking to meet quarterly; many are often criticised for not meeting often enough, leaving serious problems unnoticed.

Regardless of their size, scheme membership profile and structure, all schemes face broadly the same challenges, but Delo says trustees of smaller schemes often struggle with their governance duties, in part because they lack financial resources.

“Advisory fees are often disproportionately high and smaller scheme trustees can’t afford them. However, some smaller schemes trustees are also too dismissive of their responsibilities,” he comments.

It is an unfortunate case that many trustees of smaller scheme are simply unaware of their governance requirements and in such cases trustees should use the Pensions Regulator’s website as their first port of call, where the wealth of information can help ensure they are meeting governance requirements.

Even so, this is often not enough, as tales abound of trustees unaware of integral parts of their role, such as the need to fulfil the Pensions Regulator’s trustee knowledge and understanding (TKU) requirements.

Regulator calling

The Pensions Regulator constantly highlights the need for trustee knowledge and understanding and its code of practice aims to help develop a regime for the proper governance of schemes and to help trustees build a working knowledge of governing trust documentation and other important scheme documents.

Out of date documentation, inaccurate records, and even lost information is becoming all too common in UK pension funds, prompting the Regulator to launch guidance on record keeping – a key governance task that many schemes are overlooking.

Ken Tymms, corporate pensions manager at Grove Pension Solutions, says: “The Regulator’s guidelines on record keeping recognise that some schemes haven’t undertaken checks to see if scheme records are correct. The Regulator recognises this is poor.”

But Robin Ellison, head of pensions strategic development, at law firm Pinsent Mason, and a trustee of a number of schemes, argues the industry is “probably over-engineering” on internal record keeping.

“In most cases, private pension membership records are better than National Insurance records, for example,” he says.

“Good governance is always a sensible thing. In fact it has been operating very satisfactorily under trustee law for many decades, but without any formal documentation, which is what is happening now.”

He says the Regulator’s current interest serves to remind trustees – and in particular the chairman of trustees – that they should be mindful of risks that schemes will encounter, although no guidance can cover all eventualities.

“The challenge is that problems usually come out of left field and guidance notes are either silent or unhelpful in such cases,” Ellison adds.

Making changes

There are a number of ways in which trustees can improve their overall governance. One of those is the use of independent trustees. “A lot of trustees are recognising that they cannot do it themselves and are appointing independent trustees – this is a developing area,” Tymms comments. However, it is also one that comes at a cost, potentially putting up a barrier to access for many schemes.

The Regulator’s register of independent trustees is also tightening its requirements, so trustees can have greater confidence in who they use.

Keeping an eye on member interactions with the scheme is also good practice. PAN Governance’s Delo says a high level of member complaints and signs of poor data are usually tell-tale signs of inadequte governance. Complaints to the scheme should be reviewed and discussed at every meeting to ensure improvements are being made and any underlying issues are resolved.

Chris Atkin, CEO of Atkin Trustees, says schemes should also adopt business plans to ensure there is minimal risk and a strong governance strategy. “Business plans are very good practice and can help make trustees more aware of what needs to be reviewed at meetings; we think the trend of business plans will pick up.”

Atkin adds ensuring effective trustee knowledge and understanding is also essential.

“We do sometimes come across trustees who do not know what they are doing and are simply not up to the job,” he says.

Stepping up

Increasing risk management requirements and the need for higher levels of expertise in treating governance issues are changing the nature of many trustee boards. As discussed above, there is a clear trend towards the increasing use of professional trustees, and in cases of serious governance failures, particularly where there is a risk to members, the Pensions Regulator may step in and appoint an independent trustee for the scheme.

If governance is not a topic high on the agenda at trustee meetings, the trustees should ask themselves if they are adopting appropriate levels of risk management and whether the scheme is being run to sufficiently high standards.

They should also ask themselves whether they would be in a position to provide accurate data if required – particularly given the Pensions Regulator’s recent emphasis on record-keeping. It has now imposed standards for data quality which it expects all trustee boards to adhere to by 2012. These include 100% accuracy of common data (the data that all pension schemes must hold on their members) for all data collected after June 2010, and 95% accuracy for data older than that.

With legislation tightening around the security of pension funds, trustees cannot afford to sit back on the issue, especially in today’s environment where pensions are expensive and the strength of a scheme is vital to ensure it remains sustainable. Monitoring the employer covenant – another area where the Pensions Regulator has been active recently – is also essential.

As the recent problems of BP has shown, an employer covenant can change radically in a very short space of time, and trustees need to make sure that they have effective processes in place to monitor that.

With so many schemes entering the PPF, being forced to wind up or enter a buyout, trustees need to be in a strong position to argue for the scheme members where possible, as well as be in a confident position that everything to do with the scheme is in perfect order. Inaccurate or incomplete data, for example, can push up the cost of buyout substantially.