DB governance: Small schemes fail to keep pace

Inappropriate attitudes to risk, managing conflicts of interest and appointing new trustees were all flagged in the watchdog's report, released on Monday.

The findings come as the regulator continues its bid to boost governance standards across trustee boards. Last year, the regulator launched its 21^st century trusteeship campaign, and it has also stepped up regulatory action where trustees fail to meet minimum legal standards.

However, the majority of DB savers are in relatively well-governed schemes, according to the report, and this is particularly true for those in larger schemes.

Ninety-two per cent of trustees and 87 per cent of employers interviewed had read the watchdog’s DB code, or a summary of it. Furthermore, 94 per cent of trustees are clear about which employers are legally liable to support their scheme.

Governance gaps remain

But the research found that trustees of smaller schemes tend to place less emphasis on assessing fitness and propriety of new trustee board members and their arrangements for managing conflicts of interest.

Smaller schemes generally scored lower than larger schemes on their trustees’ adherence to the DB code principles, particularly around taking and managing risk.

Particular areas of weakness highlighted by the regulator included a failure by some trustees to include appropriate contingency planning within their risk management frameworks, and a reluctance by some trustees to assess employer business investment plans robustly.

Furthermore, there was a significant increase from last year’s survey in the percentage of trustees reporting that they take no actions to ensure their scheme is treated fairly among competing demands on the employer.

The watchdog is using the results of the survey to target schemes that are less likely to be meeting the standards it expects.

It has already contacted the trustees of several small schemes earlier this year to explain how it rates their covenant, and highlighting the issues it wants them to address before their 2018 valuation is finalised.

The regulator also intends to address potential issues of schemes not being treated fairly by identifying pension funds where recovery plan end dates are being extended unnecessarily.

It will do the same in cases where it believes funding plans are not ambitious enough, and where dividends are a lot higher than the level of contributions that have been paid to the scheme.

Costs are disproportionate 

Rachel Croft, director at Independent Trustee Services, agreed that many lay trustees struggle to assess employer business investment plans robustly.

“They are having to consider themselves a creditor of the company which employs them, and that’s not always a comfortable place for them to be in,” she said.

Bigger pension funds are often better resourced to maintain higher standards of governance. Regardless of scheme size, all funds must produce a report and accounts and carry out an actuarial valuation.

“The [governance] costs are not directly proportional to the size of the scheme, and I think that can be the issue sometimes,” Croft noted.

Steve Delo, managing director of PAN Governance, also cited advisory costs as an issue. Hourly rates for consultants and lawyers are similar whether a scheme manages £20m or £2bn.

“The bills look disproportionately large on the small scheme and invariably there is considerable push-back from the employer,” he said.

“That makes it very difficult for the small scheme trustee board to do the sort of investigative, speculative, forward-thinking, risk-mitigating or exploratory work that a larger scheme would do as a matter of course,” Delo added.

Regulator must help small schemes

To help trustees convince sponsors they are not being profligate, Delo said the regulator could issue guidance to employers on the cost of running a scheme and meeting threshold levels of compliance.

Greig McGuinness, trustee representative at Dalriada Trustees, said that without the time and budget to ensure they are always on top of new developments, trustees of smaller schemes are less able to challenge their advisers, or stand up to their employer in covenant negotiations.

These trustees would welcome direction from the regulator, according to McGuinness. “They have almost someone to point to when they go to the employer asking for more money, asking for more time,” he said.

Paul Tinslay, principal and head of governance proposition at JLT Employee Benefits, said that for schemes with fewer resources, “avoiding conflicts of interests, when you’re operating as a trustee, can actually become more difficult”.

In very small schemes, trustees are often senior members of the management team. This can lead to conflicts around the amount of time spent on scheme matters, according to McGuinness. “A lot of the time that they spend on the pension scheme is being stolen from managing the company,” he said.