UK – Low standards of trustee knowledge and understanding, and “poor governance” plague many schemes, particularly smaller funds, the Pensions Regulator stated today in its medium term strategy report.
According to the regulator, “Our experience is that the standard of governance of many schemes, particularly smaller ones, is poor.
“Our in-house research shows clear evidence of low standards of trustee knowledge and understanding, particularly in schemes with under 1,000 members.”
This was one of several key issues addressed in the report, published roughly a year after the regulator’s inception. It sets out a number of future challenges for the organisation, and its plan of action over the next three to five years.
The regulator’s other priorities include strengthening the funding of defined benefit schemes and focussing on the health of underlying sponsors, and reducing risks to members of worked-based defined contribution schemes.
According to the regulator, while trustees provide the “greatest opportunity” to improve scheme governance, they are the least in touch with the regulator and occupy last position when it comes to their knowledge and access to information.
“Trustee conflicts of interest are also a concern, especially in DB defined_benefit schemes with funding difficulties,” said the regulator.
According to the report, the regulator wants to improve the governance of work-based pensions so that trustees can effectively address risks relevant to their schemes.
“In view of the size of the assets and liabilities involved, and the difficult judgments to be made by trustees, including negotiating with employers, it is vital that high standards are achieved and sustained,” said the regulator.
It added: “Trustees will need high quality support from their advisers and administrators. It will also be important for there to be a continuing supply of people willing and able to take on the demanding duties placed on trustees.”
The regulator’s chief strategist John Ashcroft said, “There are variable standards of trustee expertise and governance.”
Approximately 95% of trustees from large DB schemes have attended various training courses over the last three years compared to just 19% of trustees from smaller DC schemes, said Ashcroft.
“Raising standards while considering the supply of trustees and the cost of regulation will require sensitivity and obliges us to ensure, for example, that the right training materials are available,” said the report.
“The first stage is to ensure that trustees at least understand what is expected of them, especially in relation to the requirements on trustees to have appropriate knowledge and understanding which came into force in April 2006.”
Fidelity’s UK business managing director, Martin Harris, today condemned several media reports that took a “free swing” at defenceless trustees.
According to Harris, many trustees “do a fantastic job given the resourcing they have available to them”.
“They seldom get paid for it, it’s a very onerous task, and many of them are exposed to legal liabilities for the decisions they take.
He continued: “I think the Regulator has been very opportunistic in pointing the finger at trustees. I think it’s very unjustified. I really do think we’ve got to speak out in defence of the hard-working trustees we deal with every day. They are very knowledgeable, they take their job extremely seriously, and they are unerring in the level of responsibility that they accept.”
The regulator – which regulates about 85,000 funds - plans to work especially closely with roughly 1,600 of the UK’s largest schemes which account for 85% of total scheme membership.
Ashcroft added that while the intensity of regulation would vary between schemes based on logistics and the regulator’s capabilities, there would be “no abandonment”.
The regulator stated that it plans “active intervention” for between 150 and 300 funds of the 1,600 that have a “significant risk” for members’ benefits.
According to the interventions outlined, trustees could be suspended or even be replaced by independent trustees.
LSE governor and pensions expert Ros Altmann said, “The regulator does now seem to be taking things seriously and wants to help. It is taking things seriously on behalf of members at last.”
Speaking during a BBC Radio 4 interview this morning, she said with regards to active intervention: “For too long these pension funds have often been run by employers for employers.
“You’ve had member nominated trustees but they haven’t really been equipped to do very much. Now you have a regulator who
can actually look after the interests of members. If you put your money in a bank you wouldn’t expect it to be run by amateurs.”
She added there are also “big conflicts of interest” where employers want to try and minimise the amount of money they contribute to the scheme.
“So if the regulator can perhaps reduce the power of the employer on these trust boards and make sure that there are proper safeguards in place, that would be a great help.”
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