The Queen’s speech announced a new Pensions Bill to look at tightening the regulation of Master Trusts both in terms of their inception and their ongoing governance. It is clear that the selection of trustees for Master Trusts will become more rigorous and the standards of governance required from them will be higher and subject to increased scrutiny. There is concern across the pensions sector about the number of Master Trusts and their governance with significant consolidation expected to lead to significantly fewer, larger Trusts with much stronger governance. But stronger governance will not just be confined to Master Trusts.
During the course of last year, the Pensions Regulator initiated research into the trustee role and published some of the findings under the heading “trustee landscape quantitative research” on its website as well as hosting a number of debates on the findings with trustees and advisers. Lesley Titcomb, the Chief Executive of the Pensions Regulator, set out the increased focus that tPR will have on the selection, competence and capability of trustees going forwards.
The first evidence of this direction of travel was set out in the DC code of practice and DC guides which set out guidance around the selection of trustees, potentially including psychological assessments, diversity of the trustee board, competencies and clear individual development plans. But there is no reason to think that these requirements will be confined to just Defined Contribution arrangements and indeed, the Regulator made this point in its most recent publication - “21st Century trusteeship and governance discussion paper” where it suggests that the requirements for DC schemes should be a read across to DB schemes too. It particularly emphasises the need for diversity in the makeup of trustee boards.
The DC guidance also sets out the case for trustee board effectiveness reviews which are likely to become important evidence that the trustees are carrying out their roles with proper diligence and that they are identifying areas for improvement. The research carried out by tPR found a strong correlation between individual development plans for trustees and strong trustee governance and so this is likely to be a particular area of focus in such reviews.
We expect such reviews to focus on whether the trustees have put in place robust business plans and risk registers, resourcing plans and a strategy for internal audit reviews but they will also focus on some of the collective and individual of the trustees. As well as the background and skills of each trustee, their individual style and interaction with other trustees in sub-committees or trustee meetings will need to be taken into account as well as how the trustees function as a whole. We anticipate that pressure will be put on the Chair of the trustees to report on whether they have undertaken a trustee board effectiveness review and perhaps more importantly the actions taken to address any issues raised.
We have seen instances where decision making within a trustee board is heavily influenced by individuals who are perceived as technical experts or where a particular forceful chairman does not engender proper debate and review of significant changes in investment strategy. Perhaps the most alarming case we came across was where the Chairman of the trustees was being financially incentivised to encourage other trustees to accept the corporates proposed schedule of contributions.
It is clear that we are now set on a path of stronger trustee governance and the pressure will be on trustees and particularly, Chairs of trustees to evidence good governance.