Tough decisions thrown up by the Covid-19 crisis are exposing the governance gap between trustee boards with adequate technical knowledge, and well-meaning but underskilled amateurs. The regulator must keep up its push for better standards, argues FT pensions correspondent and Pensions Expert columnist Josephine Cumbo.
Many more of us will abandon office life and work permanently from home.
Meetings with professionals, ranging from doctors to lawyers and business contacts, will occur more frequently via video calls as traditional face-to-face meet-ups become a thing of the pre-Covid-19 past.
In the world of pensions, the crisis should bring about a quicker end to poorly-run trustee boards, particularly in small to medium-sized schemes.
Covid-19 has meant the days of running a board with well-intentioned amateurs are not just undesirable but intolerable
The pandemic — with the financial strains it has placed on business — has brought into sharp relief the need for those overseeing the pensions of millions of members to be up to the job.
This means being not only knowledgeable, diligent, and an effective communicator, but also awkward when necessary.
The sad truth is that many trustees, however well-intentioned, do not fit the bill.
Coronavirus uncovers skills gap
The Pensions Regulator confirmed this in February when it set out plans to raise the competence and knowledge of trustees — moves that were long overdue.
But this initiative has been put on ice as the regulator redirects its resources to meeting the current challenges around Covid-19.
Tackling poor governance should be pushed back up the regulator’s agenda, as well-run schemes are essential to protecting members’ interests in good times, and bad.
The reason why things need to change is that Covid-19 has made the job of a trustee much harder in terms of their decision-making.
We need trustees who do not feel out of their depth, and are confident of asking for help or blowing the whistle, if that needs to be done.
Prior to the crisis, some trustees could muddle through without having deep knowledge of the business backing the scheme, or the industry in which it operates. This shortcoming does not apply exclusively to non-professionals.
Trustees who may have lacked technical or specialist knowledge typically made up for this with commitment to doing a good job as dedicated amateurs.
But the crisis has meant that many lay trustees are being required to make many more decisions where technical and specialist knowledge is needed.
Tough calls demand expertise
Front and centre of discussions for thousands of trustee boards has been the strength of the scheme sponsor — with so many hit hard by the lockdown.
Now, more than ever, trustees need to understand how a balance sheet works, cash flows and the operations of the business backing the scheme. This is because the crisis has elevated the importance of the employer covenant, which is far less certain in the current economic climate.
Being capable and competent matters because trustees are now being asked to make tricky calls on many issues ranging from requests by employers for pension payment holidays or cuts to deficit repair contributions. In these unprecedented times, trustees are making calls in difficult circumstances where all the necessary employer information is not to hand. There is a special skill in striking the right balance between making sure the employer is supported but the scheme is not being unfairly treated, compared with other creditors.
In the next few months, as the economy struggles to get back on its feet, it will be even more important for trustees to effectively monitor the employer covenant, so they can get tough, or more sympathetic to further requests for payment holidays, from a secure spot.
A proposed relaxation of insolvency laws in response to the crisis will mean trustees have to be far more proactive to ensure that the scheme is not left in a weaker position, should the business go bust.
Trustees have also had to make controversial decisions to halt defined benefit pension transfers — a move that has angered some members, but deemed necessary to protect those not transferring.
To be quite frank, the last thing members need in these challenging times are trustees who feel out of their depth or who cave in too easily to employer requests because they are baffled by business talk.
Time to reboot TPR governance work
There is no doubt that trustees — even professionals — will find these times tough as they make decisions in difficult circumstances.
But the crisis has the potential to exacerbate the governance gaps between well and poorly-run pension schemes, with savers and pensioners in the latter category effectively at greater risk of becoming second-class members.
The regulator cannot allow a class divide to deepen between scheme members just because they don’t have professional trustees on the board.
TPR to test trustees’ knowledge in bid to improve governance
The Pensions Regulator plans to conduct checks on trustees’ knowledge to assure governance standards in the industry, and has promised to consider appropriate action where they fall below expectations.
It must more actively encourage trustees who feel out of their depth to come to the regulator for help. Ultimately, those trustees who do not feel best placed to make decisions in a tougher environment should consider stepping aside, or have the gumption to push the employer to pay for expert help.
Covid-19 has meant the days of running a board with well-intentioned amateurs are not just undesirable but intolerable.
The regulator must today step up its efforts to make improved scheme governance a legacy of the Covid-19 crisis.
