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Impact Investing

IPE special report May 2018

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UK: Questions of governance

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The regulator, associations and funds themselves are increasingly grappling with the issue of pension fund governance, writes Gill Wadsworth

Inadequacies in UK defined benefit scheme governance have been largely ignored - at least until the recently when impact of this century's first recession began to hit home. As deficits once again increased, more questions were asked about the systems and processes in place to minimise the effects of market volatility, and the focus of The Pensions Regulator (TPR) has inevitably honed in on improving scheme governance.

However, efforts to enhance the way in which DB plans are run did little to stem the tide of deficits during the most recent market chaos; at the height of the recession the Pension Protection Fund (PPF) reported total deficits of £209.6bn.

Additionally, some commentators argue that not only has the focus on governance failed to improve funding levels, it has actually succeeding in accelerating the closure of final salary plans as sponsors struggle to meet expectations.

Richard Butcher, managing director at Pitmans Trustees, says: "Governance demands have indirectly contributed to the closure of DB plans. The demands cost money to satisfy and that money comes out of the employer's pocket. DB schemes have become an incredibly inefficient form of pension provision."

The creation of The Pensions Regulator in 2004 was in part motivated by a need to formalise governance arrangements and reduce the risks carried in the nation's final salary plans. However, the efficacy of the pensions watchdog is in question, with commentators asking for clarification between simple guidance and more formal regulation.

"What [the regulator] needs to do is make clear where it is encouraging and where it is exerting its powers," comments Patrick Connolly, head of communications at independent financial adviser AWD Chase de Vere. Similarly, Marian Elliott, director of actuarial services at Atkin & Co, would like to see the regulator provide trustees with clear governance guidelines to which they would have to demonstrate their adherence.

"This may provide a forum for the trustees to raise governance related issues," she adds. However since the regulator is not focused on day-to-day activities of pension funds, its monitoring of trustees' overall compliance with basic governance requirements is limited.

John Broker, director at consultancy ITM, says: "There may be some room for greater engagement with those concerned with the management of occupational arrangements as sometimes the pronouncements seem to be a little off beam."

As with almost every element of DB pensions management, smaller schemes are the most likely to struggle to keep up when it comes to implementing good governance practice. It is this sector where investment sub-committees are few and far between, and it is trustees of smaller schemes that are least likely to meet frequently and which have limited resources with which to improve record-keeping and administration.

However, the success of a scheme's governance, irrespective of size, is largely dependent on the competence of the trustee, rather than the depth of the sponsor's pockets and Butcher says that in many cases smaller schemes can outclass their larger counterparts in delivering an efficiently run DB plan. "I have seen many small schemes deliver on their objectives while I've also seen many large schemes fail; just look down the list of schemes being assessed by the PPF," he says.

For schemes that are genuinely struggling with the investment side of scheme governance, solutions are appearing from a growing number of fiduciary managers. Long popular in the Netherlands and gradually gaining ground in the UK, fiduciary managers aim to take control of a pension scheme implementing day-to-day investment decisions and endeavouring to keep a fund in better shape.

In the past month, SEI and Mn Services have both been awarded fiduciary mandates by UK pension funds; the former with the Jeyes and the latter at MacMillan Cancer Support. Speaking at the time of the appointments, the chairs of trustees at both funds said the decision to appoint fiduciary mangers was motivated by a need to improve scheme governance.

Michael Marks, chief operating officer, fiduciary management at BlackRock, says: "Given the extent of the [governance] challenge, we anticipate that a growing number of trustee boards will look to in-source external investment expertise be it on a partial basis such as in relation to their alternatives portfolio, or comprehensive basis for the day-to-day management of their portfolio."

Of course, trustees should bear in mind that even under a fiduciary management arrangement they remain responsible for the overall governance of their scheme.

Systems, processes and overall risk management within the UK's pension schemes are gradually improving, and trustee boards and their advisers are undoubtedly more aware of the risks to members from a poorly run scheme. However, there are still obvious gaps in scheme governance and if trustees and sponsors wish to avoid a more heavy-handed approach from the regulator they need to take the initiative and raise standards without fearing the threat of further legislation.
 

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