According to a study carried out by PriceWaterhouseCoopers (PWC), 85% of trustee boards of large UK pension schemes do not have individual governance objectives.
Andrew Evans, chairman of the national pensions audit practice at PWC, agrees that the figure is alarming: “it’s a very high percentage,” he says. “I would have expected between 30% and 40% to be looking at governance issues.”
The study, published last month, is based on a survey of 66 chairmen of the UK’s major pension schemes. PWC notes that the response rate of over 40% reflects the topicality of the governance issue.
The survey also found that 65% did not have a governance policy or if they did it was not used for decision making. In addition, only 46% assessed the performance of advisers and delegates.
It also notes that many of the changes that a number of trustees have already introduced to enhance governance have not been formalised and documented. Only 40% of trustee boards documented their discussions and decisions reached with the sponsor.The study also found that 45% of trustee boards have not reviewed their knowledge and skills in respect of pensions.
PWC suggests that trustee boards of large UK pension schemes find it difficult to identify and implement changes to improve governance. If they do identify the steps they do not always have the necessary skills and resources to implement them effectively.
It recommends three main areas for improvement. Trustees should develop and agree a governance policy for the scheme, assess the skills and knowledge of the trustees individually and collectively and take steps to close any gaps, and develop principles for recognising and addressing conflicts of interest.
Evans argues that if trustees shy away from addressing conflicts of interest, the adviser will take control; if this happens decision making will be sub-optimal. “It is interesting how few chairmen have realised that conflict of interest is something that they need to give more thought to,” he says.
“There are some gaps in real investment knowledge,” he continues. “Trustees need to be able to assess performance so that they can challenge their investment advisers; they must understand their tolerance of underperformance and how these factors link to their final objective of covering their pension liabilities.”
So are trustees up to the task set out in the new pensions bill that is currently before parliament? “Not at the moment,” says Evans.
“In two years time all the schemes in this survey should have a governance policy,” he continues. “All schemes should have assessed the skills that they have, and have some form of objective performance assessment of themselves as trustees.”
Evans’ main concern going forward is that trustees may not recognise that they need to free up some time through delegating and placing more reliance on people who have got real skills in one particular field. “They should not feel that as a trustee body, if they don’t have the skills in a particular area they must contribute as amateurs,” he says. “Trustees must free themselves up to develop themselves in the broader governance issues.”
Evans fears that some chairmen might say that they are too busy with actuarial and funding issues to spend time on governance. “That would be a real mistake,” he says.
“Currently some trustees meet four times a year for between three and five hours,” he continues. “Ten hours a month, as recommended by the NAPF, is not unreasonable. This includes time outside meetings such as time spent at conferences, training and on preparing for and following up on the main trustee meetings. With this kind of time commitment trustees could certainly make progress on issues such as governance.”
But if we thought things were bad at the large schemes, we should spare a thought for their smaller counterparts. “The smaller schemes are miles away from the findings in this survey,” notes Evans. “There are schemes where none of the trustees can recall seeing a set of trustee rules. There is an over-reliance on advisers; some schemes have so little resource and skill available that the adviser takes the minutes.”
Overall, Evans views the future with some optimism: “I have been pleasantly surprised at the level of interest shown,” he notes. “Trustees are seeing the scheme as much more like running a business, and that was not the situation a few years back.”