The Pensions Regulator (the Regulator) has published its response and proposed next steps on certain aspects of pension scheme trusteeship and governance.
In Summer/Autumn 2019, the Regulator consulted on trustee knowledge and understanding, scheme governance structures and DC consolidation. The consultation followed research and engagement by the Regulator, from which it concluded that more work was needed to raise the standards.
Trustee knowledge and understanding (TKU)
The Regulator’s proposal is to review and update the code of practice on TKU using expectations established as part of its 21st century Trusteeship campaign, ensuring that expectations of TKU standards remain appropriate. The Regulator also intends to simplify TKU expectations so that these are differentiated by trustee role and by type of pension scheme.
The Regulator has also indicated that its fifteen codes of practice will be consolidated into a single code on workplace pensions. Consultation on this is expected to take place in the first part of this year, with consultation on the TKU revisions taking place in 2021.
In relation to its questions on demonstrating TKU and ongoing learning, the Regulator recognises that mandating a minimum number of CPD hours was too arbitrary and could lead to the wrong focus, meaning that trustees were not focussing on individual training needs. Instead, the proposal is to set out a range of specific matters demonstrating TKU.
The possible methods will be consulted upon as part of the TKU consultation in 2021.
Although the Regulator is not proposing to mandate CPD requirements, its response sets out its thinking on minimum hours for ongoing learning. For lay trustees it suggests 15 hours per year and for professional trustees, 25 hours per year.
The Regulator’s response also confirms that the Trustee toolkit will be retained but that it will be reviewed during 2020 with a view to making improvements.
One of the obstacles picked up by the Regulator was in relation to trustees, particularly member-nominated trustees, who felt that they did not always have sufficient time for trustee duties. The Regulator recognises this issue and its response confirms that it intends to run an employer campaign reminding employers of their duty to allow trustees paid time off where they are both an employee and a trustee of their employer’s occupational pension scheme.
Scheme governance structures
The consultation also asked for feedback on whether there should be a requirement for pension schemes to report to the Regulator on actions being taken to ensure diversity on trustee boards. The Regulator also asked whether it should be mandatory to have a professional trustee appointed to pension scheme boards and whether sole trustees should be subject to higher governance standards.
The Regulator’s next step on diversity will be to create an industry working group with a view to helping pension schemes and employers to improve the diversity of scheme boards. There is not currently an intention to make reporting on diversity mandatory.
On the proposal to require all schemes to have a professional trustee, the Regulator recognised the feedback opposing this proposal. The Regulator does not currently intend to take any further action but indicates that this may be revisited in the future. For the time being, the Regulator intends to examine the impact of the Association of Professional Pension Trustee (APPT) Standards once they have bedded-in as well as other industry proposals and action in relation to the accreditation of professional trustees.
On the question of sole trusteeship, the Regulator recognised that there is no single business model for sole trustees which works better than others and instead that it is the quality of work provided which makes a difference. The APPT Standards for professional trustees also cover sole professional trusteeship and the APPT are developing a code for sole trusteeship.
The Regulator has previously expressed concerns around sole trusteeship, particularly in relation to conflicts of interest and the need to ensure saver engagement. The Regulator plans to commission research on the scale and reach of sole trusteeship, in order to gain a better understanding of the concept and consider whether further action is needed.
Defined Contribution schemes: driving consolidation
The Regulator’s consultation considered whether there were any barriers to consolidation of DC schemes, particularly where member funds have particular guarantees. On winding up such schemes, there is a risk that those guarantees will be lost. Possible solutions include assignment, compensation on surrender of guarantees and a change in legislation to allow NEST to take on such schemes.
A particular concern with assignment was the loss of oversight on assigning benefits to individual savers. The Regulator’s stated preference is assignment to another trustee if possible.
The Regulator is not intending to provide any further guidance. This is largely because the DWP is considering its response to its consultation on “investment innovation and future consolidation”. As part of any further legislation, the DWP will produce statutory guidance to help trustees establish whether their scheme offers value for members and whether they should consider making improvements or consolidating.
The two priorities identified by the Regulator are as follows:
- review and update the TKU code of practice and related guidance; and
- review the TKU Trustee toolkit.
The Regulator wishes to establish a legal industry working group to develop guidance and the tools to support pension schemes in taking steps to improve diversity and inclusion. The Regulator also intends to support the APPT in the development of an industry code of trusteeship and the Regulator intends to commission further research to identify areas of decisions and risks and the risks of full trusteeship.
In relation to DC consolidation, the Regulator intends to monitor DC consolidation activity and work with the industry and the DWP to find a solution to overcome the barriers to consolidation.