Lesley Titcomb – PLSA Trustee Conference 2015
Thank you very much for inviting me here to speak to you today. One of my key priorities is to engage with trustees and understand the challenges you’re facing at the moment, so it’s a great pleasure to see so many of you here.
I joined the regulator just under nine months ago, and in that time we’ve seen unprecedented changes across the pensions landscape. As trustees you’ve had more and more demands placed on you, and as a regulator we are having to adapt quickly to ensure that we continue to support you in your role.
Today I’m going to share with you some of the ways in which we are adapting and how our approach has evolved. I’ll also reflect on the lessons we’ve learned from our recent revisions to the defined benefit (DB) funding code and the draft defined contribution (DC) code of practice. And I’ll highlight for you some of our key priorities for the coming months.
First though, I’d like to talk to you about our latest research into the competence and skills of trustees and some of the possible options that are starting to emerge in response to these findings. If any of you have heard me speak over the last few months you’ll know that the effectiveness of trustees, and boards as a whole, is a key focus for us.
We want to establish whether trustees across all types of schemes have the right skills and abilities to meet the challenges they’re facing in light of the reforms. We want to identify what good trustee boards look like. And we want to understand what more we can do to help all trustees run schemes effectively.
To help us to do this, we embarked on a fairly extensive piece of research and information gathering to get the clearest picture that we can of how trustees across the country are operating, and how they assess themselves. The first stage of our research programme took place during the summer, when an independent research agency spoke on our behalf to more than 800 trustees of DC, DB and hybrid schemes. Some of you may be in the audience here today, and if so, many thanks for contributing.
We published the results of that quantitative research at the end of October.
The findings confirmed what many suspected: that in terms of self assessment larger schemes are generally better run than smaller schemes, that DB schemes generally get more attention than DC schemes, and that schemes used for automatic enrolment are generally more engaged with scheme governance and undertake more formal training than other schemes.
It showed us that while many schemes are being run very effectively, there are some concerning areas in relation to specific skills and engagement.
One significant finding was that some trustees identified that a key gap in their knowledge was around investment skills. Those of you who feel you need support in this area will be glad to know that about an hour ago we published new guidance on Integrated Risk Management (IRM).
This is obviously directed at DB schemes, but there is also information in there that is of general relevance.
Our aim with this new guidance is to help DB trustees manage covenant, funding and investment risk in an integrated way. That guidance is available now on our website and I encourage you to take a look. It sets out how trustees and employers should be thinking about risks materialising, and how they could manage the impact of those risks. Some schemes are doing this very well already, and for them, our DB funding code reflects existing good practice.
Others need further help and there are plenty of examples in the guidance of how IRM can be approached by different types of scheme. Because IRM goes further than merely understanding risks. It’s about managing them. My colleague Fiona Frobisher is running a more detailed breakout session later today on IRM for those of you who’d like more information on that. And we’ll also be producing further detailed guidance for DB scheme trustees on investments later next year.
Having gone through the process of revising the DB funding code, we were somewhat surprised that the research showed us a lack of long-term planning and clear objectives of some schemes, and this further guidance is very much aimed at them. There needs to be a balance between the needs of the scheme and that of the employer, and this reflects our new statutory objective, having regards to sustainability of the employer. It’s not always easy and we acknowledge that trustees and employers have to work hard at it.
We have learned how helpful early collaboration between parties can be, and generally how keen to be involved employers are.
Next phase of research
To support our initial research on trustee competence, we’re now carrying out further more in-depth qualitative research and analysis across a variety of schemes. So far we’ve held deep discussions with around 30 boards. Some of the areas we discussed with trustees included: how board meetings are run, how trustees work with advisers, how trustees ensure good governance in areas such as record keeping and how trustees can monitor investment strategies effectively.
Our policy team is also observing trustee board meetings, actually sitting in on the meetings to look for what trustees do well, gaining first-hand information about how boards work, how they are interacting and the everyday challenges and issues they face. We’re also drawing on the field of mainstream corporate governance to identify key principles for trustees, focusing on the key behaviours and expectations of those managing financial assets on behalf of others. So what do these findings mean for you, the trustees whose job it is to deliver the outcomes pension savers expect?
Well, we will be spending the next few months analysing our research data and talking to stakeholders in the industry. We’ll then be considering how to develop tools, guidance and examples that can help all trustees improve their knowledge and understanding.
One very clear thing we’re exploring for example, is that our trustee toolkit is very much a one size fits all piece of supportive machinery at the moment. It’s becoming very clear to us that we are going to have to segment our populations further. And some targeted training and support, for example for lay trustees or member nominated trustees. We‘ll also be issuing help in the new year on trustee training and on trustee board dynamics, and the role of the Chair. We’ll consider options that are achievable using our existing powers within current legislation, but where necessary we will also flag where changes would require the consideration of Parliament.
Good trusteeship is at the heart of ensuring strong outcomes for scheme members. That’s why this is such an important ongoing area of work for us. I assure you we will give clear messages on our expectations.
We’ll share with you what we consider to be good practice and we’ll produce tools and guides that help you become more effective. And we’ll pull all this together to give our vision of what we think a 21st Century trustee should look like.
DC code consultation
In the meantime there are a number of other things we are doing. We are revising our DC code of practice. The new draft code was published for consultation two weeks ago and I strongly encourage you to read it and give us your feedback.
Above all, what we’ve learned is that our regulated community wanted more clarity from us. We have listened and acted on this. We are making a huge and continuing effort to make all of our communications as clear as possible, and this can be seen most recently in the draft code. We’ve used specific design principles in order to achieve that clarity. So the code is short and simple. I challenged my team to produce something that was half the length of the existing code and they have met that challenge.
The code sets out all the standards of conduct and practice we expect of trustees in one place. It’s clear, unambiguous and leaves no room for uncertainty. And we’ll be providing further guidance to support this DC code in April of next year – these will be practical 'how to' guides that sit alongside the code. So the code will list the standards we expect of trustees and the how to guides will show you how to achieve those standards.
Value for members
Another lesson for us was that trustees and other stakeholders wanted further support and guidance specifically in the area of value for members, not only from us, but also from the other regulators. Again, we have listened and acted.
A new section on value for members forms a significant part of the new code. We’ve been working with the Financial Conduct Authority and IGC Chairs to make sure that our code content is aligned with their material as far as possible. We’ll also be providing further guidance on value for members in the how to guides.
So, what does 'value for members' look like? Well, occupational schemes are hugely diverse – and it is therefore impossible to give you one uniform model or idea about what ‘value’ is. You, as trustees, have to make a judgement call as to what you think is valuable for your members. You’ll need to explain – in the annual Chair’s statement – how and why you’ve assessed the value for money that your scheme provides for members.
You’ll notice I’m using the language 'value for members'. Very often people use 'value for money' and the problem with that is that sometimes it can be assumed that what we mean is 'low' or 'lowest' cost. And that is not the case. But it’s important to stress that we do expect trustee boards to understand the costs and charges that are placed on their scheme as far as possible and to set these out for their members so they understand what they get for their money. We expect boards also to think about scheme management and governance, administration, investment governance and how schemes communicate with members, because all of these can add value.
And we expect boards to obtain information from relevant parties such as insurers, service providers and investment managers. We want to stress this point about trustees remaining responsible even when they rely heavily on the advice of professional advisers.
It’s really important that trustees are able to understand and, where necessary, challenge advice. Trustees who are not satisfied that they are receiving good value have a number of options, including going out to tender to replace existing service providers, or taking other steps to try to improve the situation. But we want them to look across the piece, it’s not just about advice and it’s not just about cost, it’s about all of these things and how they represent value for members.
Change in our approach
You may have noticed that I’ve used the words 'we expect' frequently when referring to board behaviours and to the code. I do this deliberately because it marks a change in our approach. We do expect certain behaviours and activities from trustees in order to mitigate the risks to their members. And we want our language to be absolutely clear – so that you in turn are clear about what behaviours and activities are expected of you.
What you will see in the code and in our accompanying guidance, as well as all the basic legal requirements, is a set of extra guidelines which reflect the underlying philosophy of trust law. Trust law has always informed what a good, effective trustee should be doing, and it’s fundamental to trustees’ responsibilities. We obviously expect compliance with the basic legal requirements – but we also expect trustees to pay attention to the extra considerations. To consider what else they can be doing, beyond the scope of the basic legal requirements, to improve their members’ situation and drive good member outcomes.
If we see schemes not following the code, then we’re more likely to direct our attention towards those schemes – that’s not new. But I want to stress that we’ll be providing guidance on our expectations as the regulator as to what delivering really effective trusteeship looks like. And we’ll consider whether schemes are meeting those expectations and we will make it clear to them if we think they are not.
I’m confident that this clearer approach will be welcomed by our regulated community. Just last week we held a small event with a number of our key stakeholders, some of whom were trustees, and the message from them was unmistakeable:
"Tell us clearly what you expect us to do. Be bold. Speak with authority."
It is messages like this, directly from the mouths of our stakeholders, which have given us the encouragement to be bold and strong. We know we can effect change and raise standards in this industry through speaking out and setting expectations. And that is what we will do. We have enshrined this philosophy internally and it is now reflected in our organisation’s vision and values. Our staff are committed to making bold decisions and to delivering clear and consistent messages.
Our new draft DC code is a clear example of that thinking. The consultation period will run until end of January and the code will be laid before Parliament in May. The more people that engage with us during this consultation period, the better the final version of the code will be.
On the subject of engagement, I want to take this opportunity to encourage all of you to engage with us – and not just in respect of the DC code. As your regulator, we’re looking for trustees and employers to engage with us informally when we need to discuss something, and supply information voluntarily when reasonably asked.
Particularly for example where we are collecting data on what’s happening across a number of schemes, to inform our policy-making, or to help us to decide where to focus our scarce specialist resources. We actively encourage co-operation in these situations. There have been times when schemes have proved hesitant to offer information or meet us informally. Occasionally, that lack of response does lead to a formal requirement for information under Section 72.
But that’s not really what I’m talking about here. For example, we conducted a survey on what schemes were offering in terms of flexibilities under freedoms and choice. We were doing that work alongside the FCA, the FCA got a 100% response to that survey. We did not. There were a number of schemes which did not respond to our emails, they did not respond to a follow up phone call. They did not even give us the courtesy of a response. My message today is that we’re surprised rather than angry at this.
I’ve heard anecdotally that some schemes are advised by their lawyers that they don’t need to respond to us and that the law doesn’t require them to do so. But I’m standing in front of you now, as the CEO of the regulator, and I’m asking you, as trustees, to engage with us if we seek information or perhaps request a meeting. At the very least, please respond to our emails and phone calls. I’d like to see an open and collaborative relationship as far as possible without us having to resort to Section 72.
Of course, it’s entirely reasonable for schemes to ask why we want to meet them, or why we are requesting data – and we’ll do our best to answer clearly. More often than not, the request is for policy purposes. And we always try to provide feedback on what we’ve learned or done with the information provided.
In summary, it’s been a busy nine months for all of us in the pensions industry. A lot of us are still adjusting to the changes, and learning lessons as we go, and that includes me. Some trustees and boards are considering a more professional approach in order to cope with the added responsibilities brought on by the recent reforms. And this can be challenging for some schemes and indeed some individuals.
But we, the regulator, are here first and foremost to support the regulated community. We aim to educate, enable and only enforce when necessary. That’s why we’ve concentrated on our communications, making sure our messages and expectations are clear and relevant to you. It’s why we’ve encouraged you to engage with us in an open and collaborative relationship. And it’s why I come to events like this, to listen to the challenges you’re facing and to respond appropriately. That way all of us can ensure that savers have the best possible retirement outcomes.