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Mark Boyle – PLSA Trustee Conference: In search of the governance premium

Wednesday 7 December 2016

Thank you to Joanne for the opportunity to be here today.

Good governance matters. It’s the bedrock of a well-run pension scheme. There is a clear link between good governance and good fund performance. So it is not a 'nice to have' but an essential part of effective scheme management. That’s why we take it so seriously.

This conference is timely. Many of you will be aware that we released our discussion paper on 21st century trusteeship in the summer. Indeed some of you here today responded to it, and thank you for that. The paper was designed to stimulate a discussion about how trustee boards can meet the challenges of scheme governance in the 21st century. And how we, as their regulator, can help them.

We’ve been considering all these responses and will be publishing our response in the next few days. It summarises the key themes and ideas that came out of the paper, so that industry can see how the debate is shaping up. It also outlines some of the specific actions we intend to take as a result, and I’ll share some of those with you today.

You’ll also be aware that the Minister for Pensions has announced the publication of a Green Paper on DB pensions, which is likely to include a look at TPR’s powers. And of course the Work and Pensions Select Committee is coming to the end of its enquiry into the regulatory framework, again with a particular focus on TPR’s powers and those of the Pension Protection Fund. So I will talk about some of the key themes relating to our powers in a moment.

I will also speak about the new Pensions Schemes Bill, and what that means for governance, and for trustees, particularly in relation to DC master trusts.

And finally, I will be sharing with you how we at TPR will examine and, if necessary, change the way we regulate in the next 5 to 10 years.

Let me first address our work on 21st century trustee.

21st century trustee

It is clear from our 21st century trustee research, and our multiple engagements with schemes, that the quality of governance and administration is still not consistent. We know there are many highly experienced, skilled and knowledgeable trustees, and many schemes are managed very effectively. But others are not, and there are some trustees who are not responding to our guidance and calls for higher standards.

This is unacceptable. TPR is not prepared to accept two classes of member – those that benefit from good governance and administration, and those that do not. All members have the right to expect that their retirement savings benefit from effective stewardship. Evidence shows that poor stewardship impacts on the funding costs of DB schemes and translates into poor value for money for scheme sponsors. So it’s important to acknowledge that poor governance is not a 'victimless' problem.

Driving up standards of trusteeship is a priority for us at TPR. We want to see trustees being a knowledgeable, empowered first line of defence for pension scheme members. As a start we have focused this year on some basic duties – we are taking a tough stance on scheme returns and in the DC world Chairs statement enforcement, imposing fines when schemes do not comply. (We are undertaking scheme return activities against PSPS and DB schemes also although there are only a handful of cases, it is mainly DC. The chair statement requirement only applies to DC schemes.) Because if trustees are unable to get even these basic legal duties right, it is likely to be symptomatic of more serious failings.

We also want to encourage best practice across more boards. It is clear from our research that an effective chair and the presence of professional trustees on boards have a positive effect on governance and administration. We make it clear already that we expect higher standards from chairs and professionals, but we will go further next year by setting out clearly what we expect of the chair and of a professional trustee in practice. Our objective is not only to embed these benefits on more boards, but also to make enforcement action easier where these expectations are not being met.

We also recognise the important role of lay trustees. We have found that the most effective boards have a diversity of skills, points of view and backgrounds to draw upon. So whilst the chair and a professional trustee can provide a framework for good governance, administration and compliance, good lay trustees can bring a vital practical perspective and expertise.

We are not currently intending to impose new, higher standards of governance on schemes. Nor will we be producing rafts of new guidance. Rather we are looking to make our expectations clearer as to what good and bad governance looks like. We will be much clearer about our expectations of trustees. We’ll provide practical tools to help trustees apply our messages – such as checklists, best practice examples and case studies.

We will be clearer on the factors that will trigger enforcement action. And we will be looking at how we could make more effective use of enforcement to tackle poor performance and help change trustee behaviours.

In particular we’ll be focusing on the roles, responsibilities of the key players, whether it’s the Chair, professional or independent trustee, other trustees, scheme manager, scheme secretary or adviser. If trustees delegate the day to day running of their scheme to third parties, they have to be able to maintain sufficient oversight and they are ultimately responsible.

We expect trustees to have clarity not only of their own roles and responsibilities but also that of all of the key participants in the scheme. We appreciate that trustees often turn to specialist advisers and that’s fine, but we want to help trustees to actively manage that relationship. We want trustees to be able to fully understand and better challenge their advisers. And are trustees clear what they expect of their advisers? How will they know if it’s being delivered?

We will consider what tools we can produce that can help trustees engage more effectively with their advisers such as checklists of questions, or template mandates.

And is there clarity over the governance structures? If the board has sub-committees, are there clear terms of reference and a delegation framework? Are there clear decision making processes?

To help trustees achieve these standards, we intend to use our data much more effectively in order to target our communication approach. We already do communicate to different schemes in different ways, tailoring our methods and tone to the scheme size and type. We will take this segmented approach further. So where we have seen a history of good compliance from a scheme, say with the scheme return, our approach can be much lighter. It means we’ll be able to focus our efforts and resources on those schemes that are higher risk. And it means not placing extra burdens on schemes that are well run, but instead to focus on less well-run schemes and trustees that need our support.

We have talked regularly about trustee boards having technical knowledge, such as pensions law, accounting, investment, and that’s important. But it’s also crucial that boards have a broad range of complimentary, softer skills, including influencing, negotiating and communicating. So we will place increased focus on the importance of having a balanced range of relevant skills and consider what more we can do by way of education. Our view is that good governance works irrespective of the type of board – pension boards should, in many ways, look and feel like the board of a plc, with the same wide spread of skills and knowledge.

So these are some of our intentions in the shorter term. With regards to some of the longer term issues and further reaching suggestions, we are continuing to talk to the DWP, to trustees and to other key stakeholders.

You’ll have heard comments by Lady Barbara Judge (Chair of the IoD and former Chair of the PPF) recently about the need for trustees to be properly educated for their role. She makes a good point.

Educating trustees is at the heart of what we do at TPR. One of the questions we raised in our discussion paper was about whether there should be mandatory qualifications for trustees.

Many respondents thought that mandatory qualifications are not the best way of ensuring and measuring trustee competence. And we agree. We are not currently looking to introduce mandatory qualifications. However, we do want to consider how a ‘fit and proper’ regime for trustees could be developed further, taking into account the learnings from master trust authorisation and also from the experience of other regulators in the UK and abroad.

We share the widespread view that greater safeguarding is needed as far as professional trustees are concerned, given their increasing presence on trustee boards. There are various practical difficulties associated with introducing greater regulation of professional trustees. But as a first step we are looking to clarify our definition of 'professional'.

We must also address what happens where a scheme’s governance and administration fails to meet expected standards. We have a range of powers already – appointment of an independent trustee, appointment of a skilled person, improvement notices, and the suspension or prohibition of a trustee. We need to be bolder in our use of these powers, but we also believe that in some circumstances scheme consolidation may be the most appropriate strategy.

We firmly believe that there are possibilities to improve the funding position of some stressed DB schemes by reducing the costs associated with governance, administration and investment management. Some sharing of professional services may also bear down on costs. In the case of the many tens of thousands of DC schemes, their consolidation within authorised master trusts may be the best long term solution for their members.

If there were to be consolidation of some of the smaller schemes, this would also naturally reduce the number of pension trustees that are needed; which would go some way to allaying the concerns of some people that there aren’t enough new trustees coming through.

At TPR we are open minded about the longer-term solutions, which is why we are so keen to engage with stakeholders and the wider industry. But, of course, some of the more interventionist options would require changes in legislation, which would therefore be a matter for Parliament.

Which takes me neatly onto the subject of TPR’s powers.

TPR’s powers

As I mentioned earlier, the Minister for Pensions announced that the DWP will be publishing a Green Paper on DB pensions in the New Year. He has said that the paper is likely to cover the regulatory framework and TPR’s powers, and we are working very closely with the DWP on this aspect.

First let me state that in our view, the system is working largely as Parliament intended. Our analysis of the data of DB schemes shows that the vast majority of employers with DB schemes should be able to repair their deficits and meet their long-term financial obligations to their schemes’ members.

The flexibilities available to DB pension schemes and their sponsoring employer means that over the longer term most employers will be able to pay members their promised benefits.

However we do think it’s right that the system is reviewed from time to time to take into account changing circumstances. After all, the current framework was created by the Pensions Act in 2004, and the world is now a very different place.

Other stakeholders, including the PLSA, have offered their suggestions as to whether and how the system might be improved. For our part, we think there are a few areas and we are in close discussion with DWP; in particular, in the areas of information gathering, clearance and anti-avoidance, scheme funding and evaluations, and scheme governance.

We are wary about requesting new powers or suggesting changes to the system, which could have adverse knock on effects in other areas. In the case of what we call ‘mandatory clearance’ for example, we would not want to make it mandatory for every company to come to us before every transaction. But in certain circumstances, for example where a scheme has a serious level of underfunding, or where an employer covenant would be materially weakened by a transaction – there may be a case for mandatory clearance. These matters are currently still being explored by DWP. The Green Paper will signal where government’s thinking stands, and if these ideas are progressed, there will of course be a consultation process.

Master trust regulation

Let’s now move on to DC schemes, which are becoming increasingly dominant in the pensions landscape, primarily as a result of automatic enrolment. Since AE began in 2012 over 6.7 million new savers have been enrolled into a pension. By 2020 the figure is expected to be 10 million. It’s important to remember that it is these savers, rather than their employers, who are bearing the risk of investments made in these schemes. So it’s absolutely crucial that there are high standards of governance and administration in these schemes, and that savers receive good value for money.

The vast majority of newly enrolled savers are being put into large DC schemes, primarily master trusts. Therefore master trusts must be managed properly. The governance must be in good shape and savers must have as much assurance as possible that their savings are protected.

Currently new master trusts are subject to far less regulatory scrutiny than new contract-based schemes.

So we are of course delighted at the new Pension Schemes Bill. We’ve been expressing concerns for some time about master trusts, particularly the low barriers to entry, and the lack of protection for members in the case of a wind up. The Bill, when introduced, will give us new powers to authorise master trusts before they can open for business. And to stay in the market they will have to continue to meet strict criteria. This includes protecting members’ funds in the event of a scheme wind up. And we’ll also have the power to de-authorise those that don’t meet the criteria.

The new powers will add to existing protections, such as the independently audited Master Trust Assurance Framework which we continue to encourage schemes to achieve. They will however give TPR a more pro-active, supervisory, stance in relation to these schemes.

Master trusts have the potential to offer better governance, sustainability and value for members. We believe that they, as well as Group Personal Pensions, are the lynchpins of a sustainable and safe occupational DC schemes’ market. (From April 2016, TPR publishes a list of group personal pensions (GPPs) open to any employers seeking to comply with their automatic enrolment duties. TPR believes well-run multi-employer master trusts and GPPs are the best choice for small and micro employers preparing to meet their workplace pension duties. The criteria for GPPs to appear on the new list are intended to mirror, as far as possible, the criteria for master trusts. Crucially, this means that not only must GPPs be open to all employers but that providers will need to confirm that their independent governance committee or governance advisory arrangement has assessed the product on offer.)

Ultimately, the bill will drive up standards within those master trusts, which is good news for members, many of whom are approaching pension saving for the first time.

TPR future

I’ve spent time talking about our expectations of you, the trustees. But it’s not just about us telling you what you should be doing. It’s also about looking at how we at TPR do things.

The pensions system has changed considerably in the last 10 years. Our role and responsibilities have increased enormously. The economic environment we operate in has been tremendously challenging, and remains uncertain. We have to adapt our regulatory approach in response to these challenges.

We also need to consider them in light of further challenges ahead such as the UK’s exit from the European Union, and the introduction of the new Pension Schemes Bill. IORP2 will potentially place high standards of fitness and propriety on all trustees.

Our Chief Executive, Lesley Titcomb, has commissioned a piece of work, which we call TPR Future, to consider how we should exercise our responsibilities, across DB, DC, public service schemes and automatic enrolment, for the next five to 10 years.

The programme will cover how we analyse the data we collect, how we prioritise, how we allocate our resources and how we use our powers. I should emphasise that this piece of work will not be looking at our powers or wider pensions policy, but rather how these work in practice.

We’ll take account of the changing environment in which we operate and the lessons we’ve learned from operating the regime over the last 10 years.

We’ll be asking key questions, such as: do we have the right balance between educating, enabling and enforcing? Do we identify the right risks when allocating our resources? Does DC and public sector scheme regulation require a different approach to DB?

We expect to spend five to six months looking at this and preparing recommendations for change.

Conclusion

In conclusion, I’d like to acknowledge that 2016 has been another challenging year for all of us involved in the pensions industry, including trustees. But in 2017 you can expect to see an increasing focus on governance and the role of the trustee. Legislators are recognising that it’s important to raise standards.

The Prime Minister herself has only last week suggested that she may seek to give pensions trustees more of a voice in the company that sponsors their scheme. It is too early to say how this might happen in practice, but it could mean significantly boosting the role of member nominated trustees. And it may be that companies will in future be required to give information to trustees about any future transactions that may affect the scheme’s funding position.

So the topic of pension scheme governance and the role of trustee will remain high on the agenda. At TPR we recognise the importance of these issues and will continue to participate actively in discussing them. You should expect to hear more from us on these issues in the coming months.

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