LONDON, May 25, 2023 – The Pensions Regulator’s (TPR) upcoming General Code is cited as the most important governance challenge facing pension schemes, according to a new report by WTW.
WTW’s Trustee Governance Report 2023 finds that while nearly three-quarters (72%) of schemes say they are aiming to be either ‘best in class’ or ‘better than many schemes’ when it comes to governance, only three-in-10 (30%) have taken action on each of the top three expectations, with only 6% having completed all three so far.
That leaves the majority of schemes still to complete one or more of: Trustee Board training on the Code; undertaking a gap analysis relative to the Code; or reviewing the way the scheme does risk management. However, almost all of those remaining say these are in progress or planned for completion this year.
The biggest difference between small and large schemes in their preparation for the Code is in the undertaking of a gap analysis. Nearly two-thirds (60%) of large schemes with £5bn or more in assets have completed this step compared to just one-in-five (20%) smaller schemes with less than £500m in assets.
Jenny Gibbons, pensions governance consulting lead at WTW, said: “Schemes have high ambitions when it comes to governance preparations for the General Code that will come into force this year. But progress has been slow in the last 12 months and, outside of the top three expectations, little has been done to date.
“The new Code is anticipated to be laid before Parliament imminently and schemes will then have a short period of time before the Code is formally in place. We would encourage schemes to identify their governance gaps now and make a prioritised plan for meeting them, if they haven’t already, so that they are well placed once the Code comes into effect.”
“We would encourage schemes to identify their governance gaps now and make a prioritised plan for meeting them, if they haven’t already, so that they are well placed once the Code comes into effect.”
Jenny Gibbons | WTW
In response to TPR’s General Code expectations, most schemes expect the Trustee Board to pick up responsibility for providing the two new mandatory roles of Risk Management Function (74%) and Internal Audit Function (51%). Given that almost all (97%) expect the size of the Trustee Board to stay the same or decrease in the next two years, it’s likely that these new responsibilities will fall to existing trustees or within the sub-committee structure.
Alongside meeting the Code’s other expectations, including around the regular review of an Effective System of Governance, and a regular Own Risk Assessment, this could lead to a material increase in time and focus expended on governance for trustees. The report finds that Boards of the largest schemes are already spending nearly 900 hours a year in fulfilling their duties, and the majority of trustees feel that their role has become significantly riskier (82%), more difficult (74%) and harder to recruit for (73%).
In order to meet these increasing challenges many schemes are taking action in several areas. The report found that the presence of an Independent Professional Trustee (IPT) on the Board was helpful to other trustees, as those Boards without an IPT were 15% more likely to report that their role as Trustee had become more difficult (77% without an IPT vs 62% with).
In order to address the challenge of recruiting new trustees with diverse backgrounds, experiences and skills, two-thirds (67%) of schemes have taken at least one action to help this process. These include amending the recruitment process from ‘election’ to ‘selection’ (39%); allowing pensioners to replace employee trustees (38%); making sure communications on trustee roles appeal to a wider group (26%), changing meeting practices to appeal to a wider group (17%) and developing recruitment practices to support the pipeline of potential candidates (17%).
Schemes are also reviewing their effectiveness more regularly, with two-thirds (66%) conducting a self-assessment annually and three-in-10 (29%) arranging an external third party review of their effectiveness at least every three years.
Finally, many schemes have outsourced specific functions in order to alleviate pressure on the Trustee Board and to take advantage of dedicated industry expertise. Three-quarters (76%) have an outsourced administration team, 45% an outsourced secretariat and a quarter (24%) have appointed a delegated investment/fiduciary manager.
“In response to the increasing burden placed on trustees, and without the option to increase the size of the Board, it is encouraging to see pension schemes exploring other ways to alleviate pressure and ease recruitment difficulties,” said Gibbons. “Many schemes have made the important connection between Board effectiveness and equality, diversity and inclusion (EDI) and have recognised that changes to recruitment and working practices are needed in order to attract a more diverse group of candidates to trusteeship and then make best use of their talents.”
WTW’s Trustee Governance Report 2023 surveyed 140 Trustees and pension managers of Defined Benefit pension schemes in the first quarter of 2023.
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