On 10 February 2020, the Pensions Regulator (the "Regulator") published its consultation response on the future of trusteeship and governance.
Probably the most notable aspect of the response (and a much anticipated response) is that the Regulator does not, at least for the time being, propose to require every scheme to have an accredited professional trustee.
The consultation focused on three areas:
- Trustee knowledge and understanding ("TKU"), skills and ongoing learning;
- Scheme governance structures for effective decision-making; and
- Driving DC consolidation.
This alert summarises the key takeaways from the Regulator's response in each of these areas.
1. TKU, skills and ongoing learning
- intends to update its Code of Practice so that its expectations for the content and level of TKU that trustees need to attain remain appropriate. It will look to incorporate the TKU expectations communicated in its 21st century trusteeship campaign as part of this work;
- intends to simplify how it presents TKU expectations, so that these are differentiated by trustee role-type and type of scheme (i.e. DB, DC and public service schemes);
- intends to publish for consultation its consolidation of the 15 Codes of Practice into a single web-based code during the first half of this year, and this will form the foundation for the Regulator's subsequent review and revision of TKU-related content, which it plans to consult on in the early part of 2021;
- does not plan to change current TKU legislation to require qualifications or CPD to demonstrate how TKU is acquired and maintained. It will instead "look to articulate a range of acceptable methods for demonstrating TKU" when it reviews and revises TKU content and related guidance. It will run a "regulatory initiative" (i.e. contacting a large number of schemes in relation to a particular risk) on TKU once the revised content and guidance is in place and after a reasonable period has been given for schemes to adjust;
- will explore whether to set expectations on what is appropriate for ongoing learning, including setting indicative numbers of hours and types of activities that count towards learning. The Regulator suggests that 15 hours per year is reasonable for lay trustees, and professional trustees will be expected to follow the industry-based standards, which is currently set at 25 hours per year;
- intends to review the Trustee toolkit over the course of 2020-2021 to see whether and where it can make improvements. It will try to collaborate with industry in doing so; and
- intends to run a targeted employer campaign over the course of this year to remind employers of their duties in law, e.g. the right for trustees to have paid time off.
2. Scheme governance structures for effective decision-making
- plans to create an industry working group to tackle the issue of diversity of scheme boards. The Regulator will be the first chair of the group, with others assuming this role later;
- does not currently intend to introduce a requirement for schemes to report on the steps they are taking to increase diversity on their boards, but it is not ruling out revisiting this in the future if evidence suggests a firmer approach is needed;
- does not, for the time being, propose to require every scheme to have an accredited professional trustee. It hopes that the Association of Professional Pension Trustees ("APPT") standard for professional trustees will help to bring greater consistency in the quality of professional trustees and greater confidence that such trustees meet the standards the Regulator expects; and
- has some concerns around sole trusteeship, particularly around conflicts of interest and ensuring saver engagement. It is not proposing to make any changes to how it regulates schemes using a sole trusteeship model, but it will continue to keenly scrutinise such schemes. It welcomes the industry code for sole trusteeship being developed by the APPT.
3. Driving DC consolidation
The Regulator's view is that "having fewer, but better governed schemes in the market… will be good for savers – they should benefit from more efficiently run pensions, with the right people in place to make good investment decisions". It has provided assurance that it will not be taking a "blanket approach" to consolidation – if a scheme is well-run and can demonstrate it is offering value for members, the Regulator will not push trustees to consider consolidation.
Regarding the winding up of schemes with guarantees, the Regulator views the approach of assigning the scheme to a new trustee while the guarantees remain with the existing insurer as the best approach in terms of member outcomes. The Regulator plans to investigate this further with the DWP to better understand why it is not an option that all insurers are willing to consider.
The Regulator does not plan to provide guidance for schemes with guarantees in the immediate future, as it is waiting for the DWP's response to its consultation on investment innovation and future consolidation.