On the go: Smaller pension schemes may be underestimating the risks posed to their funds by trustee governance gaps and over-reliance on key individuals.
A report by Squire Patton Boggs found that among industry-leading UK schemes with more than £10bn in assets, board-level capabilities and decision-making were ranked as the biggest risk to members.
However, overall trustees only ranked these risks as eighth in order of importance, raising the possibility that some smaller schemes are unaware of the dangers of their own limitations or are under-resourced to mitigate this risk.
Matthew Giles, partner at Squire Patton Boggs, said: “Most employers have been looking for cost efficiencies in the way they run their pension schemes. As a result, in-house pension teams have often been downsized and employers have put pressure on trustees to run leaner operations.
“This has led to the responsibility for pension schemes typically concentrated on a smaller number of people. If any trustee or adviser resigned today, would the trustees find it difficult to operate the scheme? If the answer is ‘yes′, succession plans should be formed urgently.”
Mr Giles added: “Smaller employers with smaller schemes may be equally aware of the risk, but consider it an unavoidable consequence of operating cost efficiently.”
Trustees routinely following the advice of advisers without question, and the dominance of one or two individuals in most decision-making, are particular danger signals.
Commenting on the findings, Penny Cogher, partner at Irwin Mitchell, said: “In my experience, pension scheme governance is weakest in the small schemes, and I think this is in line with [the Pensions Regulator’s] findings as well.”
In response to these concerns, regulators have made significant increases to the demands they place on boards, including with new procedures for appointing fiduciary managers and on disclosure of environmental, social and governance risks.
But Ms Cogher said compliance with these demands is becoming difficult to achieve at the scale of the UK’s pension schemes.
“Trustees, and more specifically the sponsors of small schemes, see no value in this level of governance for a sub-£10m scheme, and in truth perhaps it would be better if there was some level of proportionality around all these new layers of governance,” she said.
“It is really is the pension scheme wagging the dog for many companies.”
