UK pension consolidation puts trustee independence under scrutiny

Industry experts have welcomed UK government proposals to strengthen pension trusteeship and governance but warned that increasing consolidation could concentrate decision-making power among fewer individuals, raising concerns over independence, conflicts of interest and effective oversight.

The government has outlined plans to strengthen pension governance as the market consolidates into fewer, larger schemes, with reforms expected to be introduced at the next legislative opportunity and implemented in phases.

In its response to the trusteeship and governance consultation, the Department for Work and Pensions (DWP) said it would develop a new trustee competency framework covering areas including artificial intelligence (AI), cyber security and the oversight of large schemes, alongside stronger intervention powers for The Pensions Regulator (TPR).

Pension administrators would also face mandatory registration and minimum standards, while the government plans further work on professional trustee oversight, conflicts of interest and member representation.

Industry representatives broadly welcomed the proposals but highlighted the governance challenges posed by a rapidly consolidating pensions market, in which a relatively small number of individuals are increasingly responsible for overseeing the retirement savings of millions of members.

Steve Webb, partner at LCP, pointed to the growing demands placed on trustees overseeing large defined contribution (DC) pension funds.

Research from LCP’s Pensions Powerbrokers 2 report found that fewer than 50 individuals oversee the seven largest master trusts, which account for more than half of occupational DC pension scheme assets.

Webb said: “The world of both DB [defined benefit] and DC pensions is evolving rapidly, with more consolidation into fewer, larger schemes, and much greater demands being made on trustees.”

He added: “On DC, our research has highlighted the growing demands on a very small group of trustees overseeing DC mega funds. There is a strong case for larger boards, providing greater diversity of thought and expertise, as well as for greater infrastructure to support trustees and protect their independence from the pension provider.”

Chintan Gandhi, chair of the Association of Consulting Actuaries (ACA), similarly warned that consolidation was increasing the importance of robust governance arrangements.

“A world of fewer, larger pension schemes raises the stakes. When a relatively small number of people may ultimately influence the retirement outcomes of millions of savers, strong governance, visible independence and effective challenge – all underpinned by resilient administration – are essential for maintaining trust in the system,” he noted.

Gandhi welcomed the government’s focus on ensuring trustee boards collectively possess the necessary skills and perspectives, while cautioning against creating additional barriers for lay and member-nominated trustees.

Conflicts of interest

Industry representatives also raised concerns about potential conflicts of interest as professional trustee firms expand into other services.

The ACA called for TPR to have greater visibility of services provided to pension schemes by firms connected to their professional trustees.

A world of fewer, larger pension schemes raises the stakes

Chintan Gandhi at ACA

Gandhi said: “As professional trustee firms expand into wider services, it must be clear who is working for whom. Integrated models can bring efficiencies, but trustees, employers, members and the Regulator need to be able to see where potential conflicts of interest and concentrations of risk exist, and how they are being managed.”

Louise Davey, head of policy and external affairs at Independent Governance Group (IGG), welcomed the government’s recognition of the benefits that integrated service models can provide, particularly for smaller pension funds.

“The focus should be on how conflicts are managed rather than on preventing firms from offering complementary services,” she said.

Davey also welcomed the government’s decision not to introduce blanket restrictions on professional trustee appointments or tenure.

Sole trusteeship under scrutiny

Industry representatives also welcomed proposals to strengthen oversight of transitions to professional corporate sole trusteeship (PCST).

The DWP intends to work with TPR and the industry to establish clearer criteria for when sole trusteeship is appropriate, particularly distinguishing between smaller schemes approaching buyout and those intending to run on.

Webb said: “Sole trusteeship can be appropriate in the right circumstances, such as when a scheme is implementing an agreed endgame strategy and a sole trustee can help to deliver this in an efficient way. But tighter rules on a move to sole trusteeship offer an additional sense check as to whether any change in governance is in the best interests of members.”

The ACA also recognised the benefits of PCST arrangements for smaller schemes but cautioned against their becoming the default governance model.

Gandhi stressed that independent challenge and diversity of thought remained particularly important for well-funded DB pension funds considering running on or distributing surplus.

Julia Yates, co-chair of the Association of Professional Pension Trustees (APPT), welcomed the government’s recognition of the strengths of existing trusteeship arrangements, including the flexibility to adopt governance structures suited to individual schemes.

She said: “Professional trustees have an important role to play in this, through independent judgement, high standards of governance and a clear focus on members’ interests. We welcome the government’s recognition of the strengths of the existing system and will work with DWP and TPR to ensure that any enhancements build on established good practice, are workable and genuinely beneficial to members.”

Despite broad support for the reforms, industry representatives emphasised that their effectiveness would depend on implementation.

Gandhi concluded: “Ultimately, as schemes consolidate, trust becomes the common currency. Earning it will require governance delivering consistently good outcomes for members, rather than simply having the right structures on paper.”