Need to know:
- Trustees of defined contribution (DC) pension schemes have been placed under the spotlight, leading to a greater focus on governance.
- Trustees will be under more pressure from employers to ensure that the objectives of a pension scheme are being met.
- Auto-enrolment, and the increase in the number of savers into pensions, mean that trustees need to better understand the wants and needs of a scheme’s membership in order to provide value and quality.
Trustees have long been used as a mechanism for delivering good-quality pensions that protect employees’ benefits; but in 2016, in part as a result of the advent of auto-enrolment and the need to make defined contribution (DC) pension schemes far more efficient, the standards expected of DC trustees have been raised and the role has become more challenging.
In July 2016, The Pensions Regulator’s (TPR’s) new code of practice for DC schemes came into force, setting out the standards that trustees need to meet to comply with legislation. The regulator’s discussion paper, 21st Century trusteeship and governance, also published in July 2016, states that in aggregate, the boards of occupational pension schemes are responsible for managing £1.8 trillion of assets on behalf of 32 million members. So what does the role of today’s trustee entail and what can employer’s expect?
Role of the trustee
In short, the trustee will act as a proxy for employees; it is responsible for the collection of contributions, investment strategy and payment of benefits. The trustee has the responsibility of ensuring that the pension scheme is run successfully.
Employer objectives
The focus on regulation of DC arrangements has increased over the past few years. Governance standards set by the Department for Work and Pensions (DWP) for most DC trustees became law from April 2015, which require all trustee bodies to appoint a chair, who is responsible for providing a yearly statement of how trustees have complied with governance standards, to be included in annual reporting of accounts.
Paul Leandro, partner at Barnett Waddingham, says: “With the ramping up of the new governance requirements, there is now more responsibility on trustees, so an employer will need to expect that a trustee is very au fait with those. If they’re not, then essentially there is some governance risk on the table.”
Further to meeting the requirements of the regulator, the focus should be on improving the member outcome and supporting employees to adequately save for retirement. In order to help trustees fully understand the pension scheme’s objectives, employers should work with them through a structured framework consisting of four phases, says Lee Hollingworth, head of DC consulting at Hymans Robertson. First, it should focus on assessment to understand the current status of employees’ retirement plans. Second is the planning stage, which should clearly set out the ambition of the pension scheme and the objectives to achieve that; third is the implementation stage, which would put actions in place in order to achieve the objectives over the next 12 months. The final stage should involve monitoring the actions and progress so far.
“It becomes a circular process,” says Hollingworth. “[Trustees] put that in place then at the end of the year, look at what they’ve done, and the member outcomes and how [it’s] improved those. The only measure of success that really matters is ‘through what we’ve done this year, as a group of trustees, has that improved the outcomes of our members?’”
Employers are focused on ensuring that the trust-based DC scheme they offer is as good as it can be for employees; therefore employers and trustees need to be very much aligned in their thinking, says Leandro. “The trustees need to understand what the employer’s objectives are for operating the pension arrangement: is it to help recruit and retain good-quality people, or is it to genuinely help people retire?” he says.
Analytics are key to determining this in order to better understand what different employees want and need depending on where they are in their life cycle or as they approach retirement. “The success of a pension scheme could be measured in terms of the actions that the [employee] is taking, [and] how engaged [an employee] is can be measured on whether or not they are taking action in relation to their retirement savings,” says Leandro.
Auto-enrolment
Auto-enrolment has broadened the membership demographics of DC pension schemes, so in order to continue to be efficient, the nature and profile of trustee boards needs to change to better reflect the diversity of the members they represent. Richard Butcher, managing director at Pitmans Trustees, says: “To deliver good-quality DC [schemes, trustee boards] need to be innovative, energetic, open-minded, willing to accept new ideas, and to use language that isn’t [their] own first language. [Trustee boards] need innovation, creativity and energy to be able to drive that forward. [They] need a wider audience of people so that [they] can engage across a wider audience of people, [and] represent the views, interests and preferences of a wider audience of people.”
Future requirements
The pension freedoms, introduced in April 2015, could create a future challenge for employers with a DC trust-based scheme in that the freedoms may not genuinely help employees to retire. There is the danger that if pension scheme members drawdown pension benefits or withdraw cash there is a danger their pension savings could be exhausted too soon, meaning the employee is then unable to afford to retire. Leandro says: “If the employer thinks the pensions scheme is not meeting [its] objectives, it will then think ‘how do I better direct my pension spend?’”
In order to get the return on investment on its benefits spend, the role of the trustee could then change to manage legacy schemes and essentially the wind-up of a scheme.
With increased focus on governance and improved retirement planning, the pressure looks to continue for trustees. Lynda Whitney, partner at Aon Hewitt, says: “It is a landscape that is changing and developing quite rapidly at the moment in terms of what the expectations of DC trustees are.”
Whitney sees the DC trustee landscape moving closer to that of defined benefit (DB) trustees, but also DB trustees adopting more of the characteristics of DC boards. “We’re seeing DC trustees doing more for their members while still allowing them to access choices and decisions, and we’ve seen DB trustees coming at it from the other action of saying, ‘we need to communicate more because now we’ve got the new flexibilities’. [We see] DB and DC trustees roles in some ways coming closer together,” she says.
Viewpoint: High standards of governance bring value for pension scheme members
The pensions landscape has changed dramatically in recent years and is still evolving. Automatic enrolment is bringing millions of new savers into pensions each year. By 2020, the figure is expected to be 10 million, with the vast majority of newly enrolled savers being enrolled into large defined contribution (DC) schemes, primarily master trusts.
In the context of this changing environment, the need for effective governance has never been more important. Good governance means making strategic and timely decisions in pursuing the scheme’s objectives and achieving good outcomes for members. And it means effective structures and processes that enable trustees to have appropriate oversight of the scheme.
In particular, trustees managing money purchase plans need to take into account and understand the needs of their membership to inform the design of investment strategies and the assessment of value for members.
The big question with regards to DC schemes is: do they provide members with good value? Assessing value for members is a key responsibility for trustees and they should use their judgement as to whether their scheme offers good value. It is the savers, of course, who are bearing the risk of these schemes. That is why it is so important that there are high standards of governance and administration and that savers receive good value for money.
We have underlined our determination to drive up standards of governance and trusteeship to ensure all members and scheme sponsors can reap the benefits of good stewardship.
During 2017, we will undertake a targeted education and enforcement drive. We will seek to make our expectations clearer about what good looks like and use data to more effectively target our communication approach, tailoring our methods to the scheme size, type and compliance history.
Ultimately, we are not prepared to accept two classes of scheme member: those that benefit from good governance and administration, and those that do not.
Amanda Latham is policy analyst at The Pensions Regulator
