PLSA urges schemes to focus on ‘inputs’

According to The Pensions Regulator, only half of the schemes it surveyed said all their trustees met the standards laid out in the Trustee Knowledge and Understanding Code of Practice.

The report by the Pensions and Lifetime Savings Association, entitled 'Good governance – how to get there', cites research conducted by the Toronto-based Rotman International Centre for Pension Management, which estimated that “schemes with robust governance structures outperform their peers by between 1 and 2 per cent a year”.

Regulatory burden has grown

Schemes currently face 22 pieces of regulatory guidance, according to the Pensions Regulator, including 14 codes of practice and seven pieces of code-related guidelines.

Luke Hildyard, stewardship and corporate governance policy lead at the PLSA, said that inputs are insufficiently prepared to meet a confusing array of different codes and guidelines.

“The outcome of that is that there are quite significant variations in the standards of governance bodies in terms of how they understand the relevant issues that they’re supposed to be working on [and] the kind of service that they’re providing for their members,” he said

Hildyard noted that the PLSA has been in favour of placing more stringent requirements on professional trustees. This could include the completion of formal qualifications.

Hugh Nolan, director at consultancy Spence & Partners and president of the Society of Pension Professionals, agreed with the need to improve standards among professional trustees.

“If you’re going to be calling yourself a professional trustee, then you should have both a real expertise to bring in these areas, but also continuing professional development and higher levels of training than is currently required,” he said.

'Too much focus on risk registers'

Experts are critical of the lack of a collective skill set at trustee level and the utility of risk registers. Nolan bemoaned the “tick-box approach” adopted by many trustees.

Separate research carried out by TPR described "poorer governance standards", "less focus on training arrangements" and issues over "integrated risk management and fair treatment" among small and medium-sized schemes.  

In Nolan’s view, at least a third of schemes failed to include a potential Brexit vote in their risk registers last year.

“Even a week before that vote, there were trustees who were [saying], ‘We’ve got a risk register, we’re absolutely fine’ but had not given a moment’s thought to what the risks of Brexit would be,” he said.

“The outputs saying, ‘Have you got a risk register?’ doesn’t help to address that. What helps to address that is having people looking at it going, ‘Forget this list of things you’ve got to do, what is actually facing the scheme at the moment?’,” he added.

Mark Futcher, partner at consultancy Barnett Waddingham, agreed that there is “too much focus on risk registers”.

Futcher draws a distinction between an “absolute” and a “relative” view. The absolute view entails the completion of risk registers and looking at the scheme in isolation.

“What the trustees should be asking is, ‘Would we get a better outcome for our members if we did things differently?’," Futcher said.

A path to consolidation?

Some experts are wary of a sudden shift in focus towards inputs. Paul McGlone, partner at consultancy Aon Hewitt, said: “What you need to avoid is focussing on the inputs purely for the sake of them, because in the end it’s the outputs that you’re trying to alter.”

The report suggests that stronger inputs and resulting improvements in governance standards could help smaller schemes towards consolidation.

The paper highlights the success of Australia’s requirement for private sector defined benefit schemes to justify their existing scale on an annual basis, and proposes a similar model in the UK.

“There are people out there who will say, ‘We have to have consolidation’. The only reason people are talking about consolidation is in order to improve the outputs,” McGlone said.

McGlone views blanket proposals over inputs unfavourably, and argued that trustees should instead "do what you need to do to get the right outputs.”

“There’s an awful lot of time being spent training trustees on how pensions work, rather than how to be a trustee,” he added. “If I may use an analogy, there’s no point in having a teacher who’s got a fantastic grasp of their subject who can’t teach.”