TPR to test trustees’ knowledge in bid to improve governance

Despite not pushing forward with a requirement for every board to appoint a professional trustee, or taking action to strengthen governance standards for sole trustees, TPR announced new initiatives to improve diversity and inclusion on trustee boards in a consultation response published on Monday, and hinted at what future consolidation in the defined contribution space might look like.

However, several industry experts said they wanted to see more details about these new initiatives. Some believe this was a missed opportunity for the regulator to take a more radical stance.

Once the regulator has updated its code of practice on trustee knowledge and understanding and reviewed its trustee toolkit, it plans to test levels of trustee aptitude, and to consider action when these requirements are not met.

There has never been a clear way of demonstrating that trustees are complying with the trustee knowledge and understanding the code of practice properly

Tim Middleton, Pensions Management Institute

Pensions Expert understands the watchdog does not have a set timeline to start these checks, and has not decided how these will look like in practice.

David Fairs, executive director of policy at TPR, said: “We have listened carefully to what the industry has told us, and we are not at this stage going to introduce new measures in areas such as sole trusteeship and adding a professional trustee to boards.

“However, we will continue to monitor standards closely to ensure our expectations for scheme governance are met, and that the right action is taken where schemes do not improve. Only in this way, and by working with industry bodies, can we ensure savers are adequately protected.”

Vassos Vassou, professional trustee at Dalriada Trustees, welcomed this initiative as he has seen “a lot of bad practice from ordinary trustees”.

“I don’t blame them for that – there are standards in place already – but it is difficult for them to find the time to dedicate to pension topics,” he said.

“A lot of them are working in a full-time job and to actually get to a position where they can understand all of these pension topics to the level they need too is tough.

“That means you end up with a situation where sometimes not the best decisions are made. This is a good first step to drive those standards up.”

More detail needed

Rosalind Knowles, partner at Linklaters, argued that it is unclear how the regulatory initiative will test trustees’ knowledge and understanding.

“It is a pity there isn’t a bit more colour provided on this, because trustees will want to know what to expect. Perhaps the updated trustee knowledge and understanding code will offer a bit more insight on this in due course,” she said.

Tim Middleton, technical consultant for the Pensions Management Institute, also said the plans are vague in their current form.

He said: “There has never been a clear way of demonstrating that trustees are complying with the trustee knowledge and understanding the code of practice properly, so it would be good to find out whether TPR will be looking for people to demonstrate that they have completed the toolkit, for example, or if it will be expecting some kind of evidence in the form of a training programme.”

Ms Knowles added that the introduction of its regulatory initiative will give TPR the chance to test views in the industry, so it “might end up being a precursor to further action”.

In the consultation, the regulator announced it will establish and lead an industry working group to find ways of supporting schemes to take steps to improve trustee diversity.

“That seems to be a bit of a theme overall,” Ms Knowles said, noting that while little is ruled out categorically, the regulator has shied away from requirements to report on diversity, appoint professional trustees, and form a commitment to improve sole trusteeship.

“This suggests to me that TPR intends to keep revisiting this area and work on it progressively,” she added.

The response also dropped the suggestion that it should be mandatory for pension scheme boards to engage a professional trustee.

“It was always unrealistic to think we could get a professional appointed to every trustee board, partly due to capacity but also because of the costs involved,” Mr Middleton noted.

David Brooks, technical director at Broadstone, said the debate over the suitability of sole trusteeships “appears to have reached a ceasefire, with the regulator willing to let the current situation continue despite some industry-wide concerns, in the hope the trustees can self-regulate”.

“However, the regulator does not appear to have eschewed its views that the sole trustee market is in need of reform to ensure trustee decision-making is made in the best interests of the beneficiaries,” he said.

A nudge towards DC consolidation

The watchdog also said it will not pursue one single method for encouraging consolidation, stating that it will not take a “blanket approach”. Instead, it will continue to work with both the industry and the Department for Work and Pensions to find solutions.

However, Ms Knowles argued that the regulator clearly wants to see the market contract, especially in DC.

“There is a sense of tension that while TPR is trying to push the market in that direction, it perhaps cannot go as far as it would like. Until more consolidation happens, the industry simply cannot absorb certain levels of regulation,” she said.

Mr Vassou noted: “It’s not fair on people up and down the UK having to be in these DC schemes where they are not getting the same level of standards that those in bigger schemes are getting, and they should be.

“This is a nudge in the direction of consolidation for smaller schemes. You can understand what TPR is pushing for, and sometimes some of the initiatives the regulator drives, they do it step by step – rather than saying this is the rule from day one – as they are trying to change behaviours.”

Missed opportunity for radical regulation

Despite welcoming the watchdog’s consultation response, Mr Vassou argued that it is worrying that plans to improve the governance of small defined benefit schemes were not extensively covered.

“This is one area the regulator needs to come back to. In my experience, the trustees for those schemes are a long way behind where they need to be,” he said.

Richard Butcher, managing director at independent trustees PTL, said the document is “a balanced and well-argued set of proposals, but TPR exposed itself to the risk that it missed an opportunity to perhaps be a bit more radical”. 

He explained that the problem with governance in a lot of schemes is that “no one is holding the trustee board to account other than the regulator”.

“The regulator can’t hold the trustees of all those schemes to account, because they don’t have the resources or the capacity,” he said. “An alternative way of doing it is trying to create an external scrutiny of trustees.”

In PTL’s consultation response, Mr Butcher proposed the increase in disclosure of pension scheme information from listed companies.

“Schemes are analogies of businesses, they are incorporated entities, and they have shareholders, customers, stakeholders and service providers,” he said.

“I suggested that there should be more disclosure in the report and accounts around diversity and trustees’ knowledge and understanding, which would improve scrutiny and force a change in behaviour. What gets measured gets managed.”