Good governance is the bedrock of a well-run pension scheme. There is a clear link between good governance and good fund performance so it is an essential part of effective scheme management. Without good governance, you are unlikely to achieve good outcomes for members.
Good governance is about having motivated, knowledgeable and skilled trustees in place. It’s also about having the right structures and processes to enable effective, timely decisions and risk management, and to provide clear scheme objectives. It helps you to effectively oversee:
- administration and record-keeping
- funding (where the scheme has defined benefits) and investment
- communications with members
As a trustee, it’s your responsibility to make sure your scheme is well run. You should spend time and resources getting your scheme governance right. This will help you to minimise risk and maximise opportunities for your scheme and your members. Investing in good governance is likely to save you in the long run, delivering good value for members and sponsoring employers, and improving member outcomes.
If you run a defined benefit (DB) scheme, better governance leads to better investment returns for the risk you take to produce that return. So investing in good governance and integrated risk management can lead to better management of risk and improved funding levels for your scheme.
If your scheme provides money purchase and defined benefits, you need to make sure you spend enough time managing the money purchase benefits. Areas you should particularly focus on include:
- the default arrangement and its governance
- processing core financial transactions
- disclosure of costs and charges
- knowledge and understanding for your trustee board
- assessing value for members
Check your governance: the basics
Consider the questions below to check your scheme’s governance of the basics. These are all things that we expect you to be doing. Make sure someone is responsible for each task.
- Do you regularly discuss and review the governance of your scheme?
- Do you pay your levy on time?
- Do you complete your scheme return on time and accurately?
- Do you update scheme information on Exchange as soon as possible when things change?
- Do you respond to our requests for information about your scheme and tell us about problems and issues, including late payment of contributions and breaches of the law?
- If your scheme provides defined benefits, do you complete your scheme valuation and submit your recovery plan on time?
- If your scheme provides money purchase benefits, do you produce a chair’s statement that is good quality and on time?
If you fail to do the basics we will take action. For example, we have issued fines where schemes have failed to complete their scheme return or produce their chair’s statement. Fines are greater where professional trustees neglect the basics.
Failing to get these basic legal duties right is likely to be a sign of wider failings. We pay closer attention to schemes that we believe pose a greater risk.
Read about enforcement action we have taken:
- Failing to complete a scheme return: regulatory intervention report (PDF, 101kb, 4 pages)
- Scheme return casework: compliance and enforcement bulletin (PDF, 127kb, 7 pages)
- Failing to complete a chair’s statement: regulatory intervention report (PDF, 77kb, 5 pages)
- Chair’s statement casework: compliance and enforcement bulletin (PDF, 84kb, 6 pages)
Case studies on the value of good governance
Benefits of establishing a sub-committee
Trustees of a scheme with DB and defined contribution (DC) benefits had never reviewed their DC investment strategy. To prepare for automatic enrolment, the board reviewed its DC provision. An adviser explained their duties and highlighted the need to produce a chair’s statement that set out how the board ensured good governance of DC benefits.
After the review, the board decided it was in the best interests of beneficiaries over the long term to establish a sub-committee to focus on DC governance. They also increased the agenda time for considering DC matters at full board meetings. The sub-committee considered the scheme’s DC investment strategy and made key changes to the default arrangement. They also reduced the number of investment options to better suit the scheme’s membership.
The board retains effective oversight of DC matters for the scheme. However, the sub-committee can concentrate their knowledge and skills on DC issues so that they effectively manage risk and seize opportunities, improving member outcomes.
- Board sub-committees (this guide has been drafted for schemes providing money purchase benefits, but others may find it useful)
Costs of delaying decisions
A scheme’s investment adviser discussed risk management with the board and explained the fund’s investment strategy was considerably exposed to a fall in interest rates. The adviser presented a hedging strategy to hedge interest rate risk while maintaining exposure to growth assets. The board discussed the proposal but instead of making a decision they asked for further information to consider.
The adviser raised the issue at the next few trustee meetings. Each time the board was unwilling to make a decision to hedge the fund’s interest rate risk. They did not use a holistic approach and look at how risks around the employer covenant, funding and investment strategy are all linked. Instead they considered the interest rate risk in isolation.
Some trustees were uncomfortable with hedging using derivatives. One thought that hedge funds caused the global financial crisis. Others thought that interest rates were bound to rise not fall further. By failing to take action, the board had effectively decided to continue to run the interest rate risk.
Interest rates fell 18 months later and the scheme’s funding level reduced. Delaying the decision to hedge interest rate risk meant that the scheme had a greater deficit. As a result the trustee board needed to call on greater support from the sponsoring employer. Trustees allowed personal opinions to affect their decision-making and failed to protect members’ benefits appropriately from the risk presented by a fall in interest rates.
Delaying a decision may have the same effect as deciding not to act. Trustees need to use their advisers effectively to help them make prompt, fully informed decisions.
Costs of poor record-keeping
We reviewed scheme record-keeping in 2013/14. In two cases relating to schemes linked to the same employer, the trustees didn’t have sufficient oversight of the quality of their scheme data, which in turn meant that sufficient processes were not in place. The trustees carried out a full data cleanse to address our specific concerns. These included missing addresses and postcodes for deferred members.
As part of the data cleansing process the trustees also identified that a number of deferred members had died and arranged for their benefits to be settled. These schemes had been funding liabilities for deceased members, leading to extra costs for the schemes and sponsoring employer.
We were able to close our cases after the trustees showed their processes now trace members on an ongoing basis rather than waiting until shortly before they reach their normal retirement date, and the governance and oversight of the scheme’s administration processes had improved. By keeping records up to date, the schemes improved their efficiency and could accurately establish their liabilities.
Poor data quality can lead to extra costs and negatively affect members. Invest in good record-keeping and make sure oversight processes are robust to avoid extra costs in the future.
- Administration (this guide has been drafted for schemes providing money purchase benefits, but others may find it useful)
- Producing a data improvement plan (PDF, 45kb, 6 pages)
Trustee toolkit online learning
Go to the Trustee toolkit The ‘Running a scheme’ module contains a tutorial on ‘Scheme governance’. You must log in or sign up to use the Trustee toolkit.