Dalriada Trustees' Vassos Vassou sees professionalising the UK's trustee boards as a potential solution to the governance failings at small UK schemes. But with few sub-scale schemes able to afford the extra cost, could a regulatory levy be used to boost board expertise?
There are some 5,000 to 6,000 defined benefit schemes in the UK, with a mean size of around £300m, but a median size of only £30m. These figures indicate that half of all UK DB schemes have assets of less than £30m.
The challenge for these small schemes is that they must provide the same value to their members as much larger schemes – only without the resources and scale that large schemes have at their disposal to ensure sufficient governance and to meet these obligations.
If trustees want to deviate from the regulator’s views, they will need to explain their rationale
The regulator takes a risk-based approach in allocating its own resources, typically focusing on the larger schemes which, through their scale, represent a more serious risk. However, its corporate plan for 2019 through to 2022 states clearly that it will increasingly start to put pressure on those smaller schemes.
'Comply or explain' takes its toll
As part of the delivery of that plan, two new ideas have been mooted. The first idea is referred to as “comply or explain”. Thousands of small schemes will need to comply with the regulator’s funding requirements or provide reasons for non-compliance. Those reasons will need to be logical, well thought out and acceptable to TPR.
The key question hanging over the “comply or explain” strategy is its requirements – what exactly will schemes need to comply with?
Based on what we know, the regulator will likely provide the firmest steer to trustees on what it believes prudence looks like as part of the assumptions for actuarial valuations.
This, in turn, will drive the funding level and the rate of deficit recovery. If trustees want to deviate from the regulator’s views, they will need to explain their rationale. The issue that may well result is that the watchdog’s guidance will apply uniformly across a vast range of schemes, each with their own idiosyncrasies. Will expensive advice be required to navigate through that guidance?
Pro trustees eye growing market
The second idea is to include an accredited professional pension trustee on all trustee boards. The regulator’s own analysis shows that schemes with a professional trustee have higher standards of governance than those without. Input from a good professional trustee therefore has the potential to greatly enhance the outcomes for members.
However, there are two potential issues with using a professional trustee. The first is cost and the second is capacity. On costs, experience suggests that professional trustee fees represent just a fraction of the adviser and investment costs, but they still add to the bill. If they are effective and help control scheme spend, they may yet be viewed as added value rather than added costs.
Regarding capacity, a key factor will be how quickly the requirement to have a professional trustee is implemented. Given current numbers there will inevitably need to be a transition period, giving the professional trustee market time to grow to meet the demand. There are many pensions professionals interested in working as a professional trustee. If the demand is there the supply will grow.
I believe professional trustees will be part of the overall solution, but whether costs can be made palatable or not, the regulator’s new approach means small schemes will need to start thinking now about how the new code may affect them.
Lessening the costs of professional trusteeship could mean employers avoid paying in more money, but this will be tricky. The best idea I have seen is for the regulator to raise additional funding through its administration levy to help support the cost for these small schemes.
A small increase in the levy to support the use of professional trustees will go a long way to improving governance.
