On 10 February 2020, the Pensions Regulator (TPR) published its response to its consultation on the future of trusteeship and governance. Gowling WLG wrote to TPR with our views as part of the consultation process and we are pleased to see TPR has resisted a knee-jerk reaction to the issues raised.
Here, we consider TPR's response and what its proposals mean for trustees of both DB and DC occupational pension schemes.
Key points for trustees
1. TKU Code of Practice to be reviewed
TPR is set to review and update its Code of Practice and the Trustee toolkit in order to clarify its expectations around the standards of trustee knowledge and understanding that trustees should meet.
2. Industry working group on diversity and inclusion to be set up
TPR is not going to require schemes to report on their board diversity but is going to set up and lead an industry working group to consider how schemes can be helped to improve diversity on boards.
3. Professional trustees will not be mandatory
TPR is not going to require all occupational pension scheme boards to have a professional trustee. But TPR may well revisit this idea in the future.
4. No changes to the regulation of sole trustees
There will be no changes to TPR's regulation of sole trustees, at least for now. TPR will commission further research to identify drivers for seeking, and the risks of, a sole trustee on schemes.
5. Monitor consolidation of defined contribution (DC) schemes
TPR will "continue to monitor DC consolidation activity" and work with both the DWP and the pensions industry to "find solutions to overcome barriers to consolidation".
TPR published its consultation on the future of trusteeship and governance last July and we published an insight on the 'future of trusteeship and governance'. It called for evidence on, and put forward proposals in, three main areas:
- trustee knowledge and understanding (TKU) - whether those managing pension schemes have the right knowledge and understanding and appropriate skills (and ensuring that these are kept up to date);
- scheme governance structures for effective decision-making - how trustee boards could become more diverse, inclusive and be able to demonstrate that they have the "right mix" of skills, knowledge and understanding for running a pension scheme. Central to this was TPR's proposal that every trustee board have an accredited professional trustee and whether schemes should be required to report on the steps they were taking to increase diversity on their boards; and
- consolidation of DC schemes - TPR's proposal was that schemes that are unable to meet the expected standards of trusteeship and governance would need to improve, face enforcement action or be actively encouraged to wind up. TPR was therefore very interested in identifying ideas on how to remove barriers to DC consolidation (for example, where there are guarantees) to ensure more savers have access to well-run schemes.
This consultation followed on from TPR's work back in 2017/2018 on trusteeship under the 21st century trusteeship banner and continued a number of the themes identified by TPR during that exercise. The common theme running through all of this is raising standards of pension scheme governance.
The consultation closed on 24th September 2019.
TPR's Response to the consultation
TKU: content, level and demonstrating ongoing learning
TPR comments that the concept of TKU has not changed in the 15 years since it was introduced, but that the nature of what trustees need to know and understand has. This is because the law governing pension schemes and the risks schemes face have changed over that time. TPR has therefore decided to review and update its TKU Code of Practice and the Trustee Toolkit in order to clarify its expectations around the content and level of TKU trustees need to attain to ensure they remain appropriate for safeguarding the interests of members.
TPR states that it will look to simplify how it presents its TKU expectations. This will include differentiating according to the role-type of trustees (lay, professional, independent, chair) and the type of scheme (DB, DC or public sector). TPR plans to consult on changes to the TKU Code and provide an update on the Trustee Toolkit review in the early part of 2021. It also suggests that ESG knowledge will likely make an appearance in the Code in the future - we consider the legal positon for trustees in our insight 'ESG has moved up the pension trustee agenda - are you ready?'.
After the revised code (and related guidance) has been in place for a reasonable time, TPR plans to run a "regulatory initiative" to test levels of TKU.
As regards demonstrating TKU and ongoing learning, TPR is not going to require trustees to take exams or formal qualifications. Instead, it has (sensibly, in our view) accepted that "there are a number of ways TKU can be demonstrated in practice..." and states that it "will look to articulate a range of acceptable methods for demonstrating TKU…". In practice, such methods are likely to include completion of the Trustee Toolkit, relevant work experience and other industry-based training.
TPR is going to explore whether it would be appropriate to set an indicative number of hours and types of activities that count towards learning. TPR notes that 15 hours per year could be used as an "indicative baseline for ongoing learning" for lay trustees (following suggestions from respondents to the consultation). Professional trustees would be expected to "follow the industry-based standards" which is currently 25 hours per year.
TPR intends to run a campaign targeted at scheme employers over the course of this year and beyond to remind them of their legal duties, such as in relation to individuals who are trustees and also employees having sufficient paid time off to perform their trustee role (see sections 58 to 60 of the Employment Rights Act 1996). TPR also plans to address other issues where employers can have a "positive impact on the performance of the pension scheme", such as in the recruitment of trustees.
Scheme governance: diversity, professional and sole trustees
In relation to diversity, there will not be any requirement to report on the diversity of trustee boards at this stage. An industry working group is to be established (which TPR will lead, at least initially) to consider how schemes can be helped to improve diversity of boards (if you are interested in being on it, TPR is seeking applications by 29 February 2020 by email to email@example.com). TPR is of the view that raising the profile of diversity and inclusion, together with any materials coming out of the working group will push the pensions industry in the right direction. That all said, TPR is not ruling out revisiting the requirement for schemes to report on their diversity if it feels that a "firmer approach" is needed in the future.
Trustee boards of pension schemes will not be required to have a professional trustee. TPR states that it recognises that this is not currently feasible given existing capacity. TPR is going to support the development of the Association of Professional Pension Trustees (APPT's) standards for professional trustees and the accompanying accreditation process, which it hopes will bring "greater confidence" that accredited professional trustees meet the expected standards. However, it does rule out revisiting the proposal in the future.
The Pensions Management Institute (PMI) has also launched the Accreditation for Professional Trustees (APTitude), an accreditation programme for professional trustees with the aim of driving up governance standards.
There will be no changes to TPR's regulation of sole trustees, at least for now. TPR states that it understands that the APPT is developing an industry code for sole trusteeship, which it welcomes and supports. TPR also intends to keep this area under review and is going to commission more research into sole trusteeship as it still has concerns about this as a model of trusteeship (especially in relation to dealing with conflicts of interest and ensuring saver engagement).
In its consultation, TPR looked at ways to facilitate consolidation of DC schemes that do not meet the expected standards of governance and also wanted to hear about barriers to achieving this (such as in relation to schemes with guarantees).
In its response, TPR has not set out in any detail how it will approach DC consolidation rather it has said it will "continue to monitor DC consolidation activity" and work with both the pensions industry and the DWP to "find solutions to overcome barriers to consolidation".
We think TPR has taken a sensible approach by striking a balance between driving forward good governance whilst not overwhelming trustees with onerous regulation. TPR has resisted a knee-jerk reaction to the issues raised in the consultation which we think is an approach to be welcomed.
The response sets out TPR's proposals. Now it must start working towards implementing them. There is much to be done and at least some of that work will only be done next year. However, trustees of all occupational pension schemes (DB and DC) still need to be aware of TPR's direction of travel which is to continue to raise the expected standards of knowledge for all trustee boards. In the meantime, the response is a reminder of the importance for trustee boards to ensure they have the necessary knowledge and understanding and skills to promote good governance. Keeping up-to-date with developments, trustee training and talking to your professional advisers will all help. Gowling WLG will be helping its trustee clients with this by further developing the training modules provided by its Trustee Learning Unit (TLU).