The hallmark of good pension scheme governance is a pension fund whose affairs are managed robustly, seamlessly and effectively, with appropriate controls, free of abuse and with due regard for the law.
Just as medical check-ups make sense for the human body, occupational pension schemes, both Defined Benefit (DB) and Defined Contribution (DC) also need regular care to ensure that they are serving their members. The common goal is to ensure that all governance issues are addressed.
By installing a good governance framework, you can ensure great value such as increasing performance, identifying and managing risks, getting things done more quickly and improving efficiency. For DB schemes in particular, governance and internal controls are topics which feature high on the agenda at trustee meetings and as the standards of governance have risen within companies we are now seeing those same high standards applied to pension schemes. Some key areas on the agenda include:
- Structure of the Trustee Board
- Conflicts of Interest
- Trustee Knowledge & Understanding
- Secretary to the Trustees
- Business Plan
- Risk Assessment Review & Risk Register
- Documentation Review
- Internal Controls
- TPR Code of practice
Trustees are charged with understanding and monitoring the financial strength and covenant of the employer on behalf of the scheme members. By monitoring the employer covenant, DB scheme trustees are ensuring that they are in a strong position to make appropriate decisions about scheme funding and, if necessary, put in place a recovery plan.
When we consider occupational DC Schemes, the requirements are slightly different, with a need to ensure that there are a range of funds which meet members differing objectives and clear communication explaining the investment risks and benefit choices at retirement.
There is increasing pressure on schemes to be run effectively and efficiently as the cost of providing benefits has increased. It is evident that the Pensions Regulator (“tPR”) wants trustees of pension schemes to run their schemes like a business and this is no surprise when you consider some of tPR’s statutory objectives.
As legislation has intensified around the security of pension scheme benefits, and the accompanying scheme assets, more and more emphasis has been placed on the Trustees’ approach to pension scheme governance with an ever higher expectation on Trustees to possess a sufficient level of knowledge and understanding with which to carry out their role. Furthermore, the Pensions Regulator, amongst others, is concerned that the members of contract based pension schemes get a ‘good outcome’ and recently identified six issues that it believes need to be addressed in order to ensure an adequate income in retirement, namely:
- Appropriate contribution decisions
- Appropriate investment decisions
- Efficient and effective administration
- Protection of assets
- Value for money
- Appropriate decumulation decisions
The biggest difference in this type of arrangement is that ‘members’ have individual policies and hence there is no need for a trustee. While the employer linked to such an arrangement has no legal obligation to deal with governance, best practice should have them establish a governance committee tasked with managing these issues on an ongoing basis.