The 21st century trusteeship and governance discussion paper sets out what TPR is doing to educate and support trustees of both defined contribution and defined benefit schemes, and considers what more could be done by TPR and the wider industry in support of raising standards. We have submitted our response to the paper to help develop the 21st century trustee strategy.
Pension scheme trustees take on a complex role with significant responsibility. The range of issues that trustees have to manage is broad and multi-faceted, covering issues such as governance, administration and operational risk management, investment and financial risk management as well as member communication. Each of these aspects has significant depth too, requiring a material degree of expertise as well as the allocation of sufficient time to the role. In short, becoming a trustee is a material commitment and the responsibilities are the same as for non-executive board member in a plc.
Trustees have a duty to act in the interests of the members of the scheme. These decisions made by trustees today will affect members for decades to come. However, it is not only members that are affected by trustees’ decisions – sponsors are impacted too. There are financial implications for sponsors from decisions made in defined benefit schemes. It is critical that trustees resist the moral hazard of taking on excessive financial risk and leave the potential downside with the sponsor or the Pension Protection Fund. There are workforce management consequences arising from choices made in defined contribution schemes. In short, trustees sit at the centre of a wide circle of influence. Consequently, the quality of trustees should reflect the influence and the wider responsibility they have.
A complex eco-system around the pension schemes has emerged. This eco-system consists of trustees, sponsors, unions, advisors, legislators, regulators, consultants, money managers, media, academics, etc. Organizations and individuals invest a great deal in optimizing their particular part of the value chain, but the aggregated effects might become far from ideal for members, sponsors and society. This leads to industry practices and herding behaviour which further complicate the task that trustees face.
In contrast to non-executive board members in a plc, trustees are often unpaid and undertaking their role on a part-time basis. This is not consistent with the responsibilities of the trusteeship. This fundamental inconsistency needs to be addressed in framing 21st century trusteeship to create an environment conducive to the effective management of the complex financial organisations that pension funds are.
To read our full response to the The Pension's Regulator discussion paper, click here.