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Pensions Update

21st Century Trusteeship – What Is It?

In 2016, the Pensions Regulator’s research showed that many pension schemes weren’t meeting the governance standards expected. Their response was to launch a programme in order to combat this and raise standards of governance across all size and types of pension schemes.

The ‘21st Century Trusteeship’ programme doesn’t create a new, or higher, standard of governance for those running schemes but instead makes it clearer what actually constitutes ‘good’ governance in the eyes of the Regulator. It also sets out in greater detail what action the Regulator will take in response to breaches of those standards. 

It refers to five broad areas of scheme management, with a further 10 sub-categories sitting below that. These are:

  • Governance, roles and strategy
  • Training, skills and advisers
  • Risks and conflicts of interest
  • Meetings
  • Value for members. 

While the sheer volume of guidance put out by the Regulator might seem daunting at first glance, the reality is that not much of this is new and most trustees will already be following the vast majority of these steps as a matter of good practice. Where you are unsure or the guidance raises any questions, we’re happy to assist by working with you to ensure that you’re complying with your legal obligations and are properly documenting your processes to protect you in the event of enquiries by the Regulator.

1.Governance, roles and strategy 

Good Governance: having ‘motivated, knowledgeable and skilled trustees in place’, alongside the right structures and processes to enable the proper management of a scheme.

At a basic level the trustees should:

  • Discuss and review the governance of the scheme
  • Pay the levy on time
  • Complete the scheme return on time and accurately
  • Update scheme information on Exchange as soon as possible when things change
  • Respond to requests from the Regulator for information about the scheme and inform the Regulator of any problems and issues, such as late payment of contributions and breaches of law 
  • For schemes that provide defined benefit (DB) benefits, complete the scheme valuation and submit the recovery plan on time
  • For defined contribution (DC) schemes, produce a chair’s statement that is good quality and on time.

Clear roles and responsibilities: Trustees should focus on strategic issues and delegate effectively day-to-day activities and decision-making, where appropriate. As they remain ultimately accountable, they should have controls in place to monitor the delegated activities and ensure they are delivered. This means being clear on the roles and responsibilities of all the main participants in running the scheme. 

The trustee board should ensure it decides:  

  • The appropriate governance structure for the scheme, proportionate to the scheme’s risk and complexity
  • Which matters are reserved for the trustee board
  • What can be delegated, for example to sub-committees or working groups
  • How delegated decisions are made and escalated and who does this
  • What matters should be reported to the board.

There should also be clear terms of reference, tables of accountabilities and delegated responsibilities and service level agreements. 

Clear purpose and strategy: Trustees should have in place a clear purpose and strategy for managing their schemes effectively to achieve good outcomes for members and inform the board’s decision making. 

The Regulator recommends this is in the form of a business plan, which should be regularly reviewed and developed, and cover the following points:

  • Clear, long-term goals for the scheme and interim objectives around key areas of focus, including governance, investments (and funding for defined benefit (DB) schemes), administration and communications
  • How the trustees propose to meet these objectives and goals
  • How the trustees will measure and monitor progress towards them. 

2.Training, skills and advisers 

Trustee training and improving knowledge: Trustees are legally required to have relevant knowledge and understanding of pension and trust law and key scheme documents like the trust deed and rules and statement of investment principles. 

Additionally trustees should:

  • Have the knowledge and understanding to perform their role within six months of their appointment. Professional trustees must have relevant knowledge and understanding when they are appointed
  • Identify their strengths, weaknesses and any gaps in knowledge and understanding by carrying out self-evaluations and board evaluations. This will inform what training they may need
  • Link training plans with the scheme’s business plan to ensure the training is more effective and meets the demands of the scheme.

The Regulator provides its free online Trustee Toolkit, which it expects all trustees to complete unless they arrange equivalent learning.

Skills and Experience: Legally trustees must be ‘fit and proper’ and to have the relevant knowledge, understanding and competence to do their job. The Regulator also expects all Trustees to act honestly and with integrity.

When trustees are recruiting new trustees to be part of the board, they should, if possible, work with the employer and look at whether prospective candidates are honest, competent, financially sound, and whether they appear to act with integrity. The trustees should consider what type of trustee they are (e.g. member-nominated, employer-appointed, professional), the skills and experience they have (including soft skills such as the ability to negotiate, influence and communicate), and societal demographics (e.g. race, age, gender). 

The Regulator expects that trustees should annually evaluate how effectively the board is performing from a skills perspective, referring to the objectives set in the business plan. 

Advisers and service providers: The Regulator expects trustees to appoint good quality advisers and service providers to help run the scheme effectively. This involves selecting the right advisers to manage the various aspects of the scheme, but also maintaining sufficient oversight of the tasks the trustees delegate including regularly reviewing and managing their appointment. 

The Regulator expects trustees to always consider the following:

  • What the specific requirements are for the scheme and how an adviser can help to meet them
  • The different types of service available in the market
  • Whether they have experience of working with similar schemes
  • The reputation of different advisers and providers – trustees should ask for recommendations from a range of reputable sources
  • Whether they hold any relevant independent accreditations
  • The contract terms – make sure they are consistent with the scheme’s aims and objectives
  • If choosing between multiple providers invite tenders from them and ask for consistent and comparable information.

3.Risks and conflicts of interest 

Managing Risk: Trustees are legally required to have adequate internal controls in place, including in relation to managing risk. If trustees fail to have these then the Regulator may take action by issuing Improvement Notices, appointing independent trustees or using any other powers that may be appropriate.

Generally, the Regulator expects trustees to:

  • Create a plan to identify, document, evaluate and manage risks
  • Review and update the risk register and the effectiveness of controls regularly to take account of new and emerging risks. An example risk register is here
  • Carry out a detailed analysis of their risk management framework at least annually. 

Managing conflicts of interest: ‘21st Century Trustees’ must be aware of possible conflicts within their scheme. While conflicts of interest aren’t uncommon, trustees are legally obliged to have adequate internal controls in place. This includes having a process to identify and manage any conflicts of interest among those involved in running their scheme, including trustees, service providers and advisers. 

Trustees must:

  • Make sure they have a conflicts of interest policy in place to help identify, manage or avoid conflicts for trustees, employers, advisers and service providers
  • Outline approaches to adviser conflicts of interest in their conflicts policy, risk register or in other documented procedures. Some service providers, for example legal advisers, are professionally required to not have conflicts of interest
  • Make sure they are satisfied with their advisers’ and service providers’ conflicts policies
  • Make sure they are aware of the services their provider or adviser supply to the employer, and manage any potential conflicts.

4. Meetings and decision making 

Meetings and decision making: Trustees should meet often enough to maintain effective oversight and control, in most cases, at least quarterly. Trustees should ensure that adequate time is allocated to discussing important strategic issues as well as scheme specific issues needing immediate attention.

An agenda should be circulated to the board at least two weeks before the meeting, and trustees should arrive prepared to discuss each item on the agenda. Minutes should be taken at every meeting and the topics that should be covered at most meetings include:

  • Apologies for absence
  • Conflicts of interest
  • Approval and signature of minutes from previous meeting
  • Actions arising from previous meetings
  • Investment performance and strategy
  • Risks to the scheme (new and existing)
  • Administration including discretion cases and complaints
  • Member engagement, including communications
  • Sub-committee decisions
  • Trustee and adviser fees and expenses (i.e. budget monitoring)
  • Any decisions made since the previous meeting
  • Trustee training
  • Business plan
  • Notifiable events
  • Any other business. 

5.Value for members 

Value for members of defined contribution (DC) schemes

Trustees have a legal duty to produce a Value for Members (VFM) assessment and include their findings in their annual Chair Statement. There is no one size fits all approach to VFM assessments. The trustees should determine a proportionate approach to their assessments based on the characteristics of their scheme, but this should be a repeatable framework.

All trustees should be taking the below steps when drafting their statements:

  • Gathering information on all costs and charges in a timely manner to ensure the assessment is completed by the statutory deadline
  • Considering whether the benefits and services received in exchange are of good quality and meeting the needs of the membership. Trustees should consider at a minimum the following key areas: 
  • Scheme management and governance
  • Administration
  • Investment governance
  • Communications
  • Comparing these costs and charges to other options on the market
  • Reaching a conclusion and agreeing next steps (i.e. any actions required to address poor value), documenting the approach taken and to be used as evidence of the assessment
  • Reporting on the outcome of the assessment in the annual Chair’s statement.

Value for members of defined benefits (DB) schemes

There is no legal duty on DB schemes to annually assess Value For Money, but the Regulator strongly recommends trustees do so to help ensure good member outcomes. The Department for Work and Pensions’ recent consultation (published June 2018 and ended August 2018) proposes that in the future, the chair of the trustee of DB schemes produces an annual Chair statement and this is likely to include a Value for Money assessment.

Published: October 2018

Pensions Law Update - October 2018

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