Get To Grips With Governance
Friday, December 08, 2006
With over £700 billion of assets and over 20 million members, UK pension schemes and their effective stewardship are critical to the financial well being of a sizeable percentage of the population.
It is vital that pension scheme trustees are aware of their responsiblities as well as the current issues and legislation surrounding UK pensions schemes. Over the last decade, the proliferation of legislative requirements affecting trustees has focused on improving the way in which pension schemes are run. Effective governance is a key issue in the current pensions environment.
On 5th September this year, The Pensions Regulator published its report on the 2006 Occupational Scheme Governance Survey. The report highlights that although trustees of larger occupational pension schemes are generally confident in their ability to govern pension schemes, a significant minority of schemes have shortcomings.
The survey was based on short interviews with representatives of over 1,200 schemes and 500 in-depth interviews with the chairs, lay trustees and the pensions managers of those schemes. The summary report concludes that:
- larger schemes are generally better governed than smaller schemes;
- although trustees thought they were performing well, important gaps in good governance practice were highlighted.
For example:
- 70% of defined benefit schemes have no specific policy in place to manage conflicts of interest;
- 37% of defined benefit schemes do not review the sponsoring employer's credit ratings.
Generally, performance is consistently strongest in schemes covering the greatest number of members.
In the area of trustee knowledge and learning activities, most trustees were assessed to have some knowledge on key issues. But there was scope for improvement and again the trustees of larger schemes were said to be more knowledgeable than those of smaller schemes.
One of the areas where trustees felt least confident in their own abilities was in relation to investment decisions. Worringly, only just over half of the schemes surveyed confirmed trustees had undertaken training in the past year. Whilst many schemes are well governed, based on the survey results, there are still a "significant minority" where governance is not at the desired standard.
There is a clear need for trustees to get up to speed on the requirements placed on them and to address potential areas of risk affecting their pension scheme. This is of particular importance for trustees of smaller schemes who generally seem less confident in their governance abilities.
One way of identifying areas for improvement is to audit trustee performance and assess any areas of potential weakness. The next step would be to develop an action plan aimed at those problem areas to address those areas of deficiency. Trustees also need to assess their internal systems for implementing the new knowledge and understanding requirements.
The appointment of professional independent trustees is becoming increasingly popular. Around 10% of the schemes surveyed have professional trustees on their board and the report concludes that it is not surprising that these schemes have had above average results in a number of governance and administration areas.
Trusteeship requires considerable expertise and the report concludes that whilst trustees are generally confident in their governance abilities, there are specific areas of concern which must be addressed to ensure the best possible performance of pension schemes This is of particular relevance for smaller schemes.
Trustees should take advantage of the ever-increasing trustee training opportunities which are being offered by numerous education and pension organisations. Indeed, The Pensions Regulator offers a free online training programme known as the "trustee toolkit" (found at www.trusteetoolkit.com), which enables trustees to test their knowledge of their scheme.