Challenges of pension governance

Many trustees and employers are finding their Defined Contribution (“DC”) trust based pension arrangements are demanding much more management time; as a consequence comes increased associated operating cost. The regulatory requirements have increased significantly in recent years and many sponsors are losing sight of the rationale for governing a trust based pension arrangement as an employee benefit for their business. 

By “DC trust” we are talking about all single employer occupational pension schemes (regardless of size) rather than master trusts. In the realm of DC trust arrangements, the Board of Trustees and the sponsoring employer have control and responsibility for the pension scheme.  The governance of this scheme is increasingly referred to as a 'burden' due to the Regulator’s concern that some arrangements have not fully embraced their duties and responsibilities. We at Punter Southall Aspire don’t agree that pension governance should be seen as a burden; instead it should be viewed as a useful framework to consider how the scheme has adapted, or needs to adapt, to meet future needs of both members and sponsoring employers. In this and three more articles to follow, we consider our recent experiences:

Debunking the “burden” myth 

In this article we discuss how we have helped trustees and employers get the most out of their scheme, rather than a ticking-the-governance-box exercise
The trouble with legacy schemes

In the next instalment we’ll look at how you can revitalise your pension scheme. The most common problem is that it has become outdated, perhaps because it was set up within a larger final salary scheme or thanks to changes like pension freedoms.  

Too much governance, so little time

Our third instalment looks at some arrangements where the governance burden may actually exist, particularly legacy Additional Voluntary Contributions (AVCs), and how this burden can be alleviated.

Crippling cost of legislation

Finally, we discuss how legislation to improve pension savings can also put a financial strain on employers.  Is it time to take a step back and consider the bigger picture including auto enrolment and administration? 

Debunking the pension governance myth  

There is no hiding that the expectations on Trustee Boards have increased over recent years with the introduction of the Code of Practice and Chair’s Statement requirements. Many find this frustrating and cumbersome but it is important to not lose sight of the end goal of this regulation – to give members the best outcome

The first year these regulatory items are looked at can be tough as there is often a lot of tidying up to do. However, for a well-run pension scheme, once the core processes are in place, the compliance element can be very straightforward - freeing up the trustees’ time to focus on what’s important.  

Some of the more notable developments as a result of the Code include:

A renewed focus on member communications

Many schemes are looking at ways to bolster member support in order to help members make more informed choices and increase engagement within the workforce towards their pension arrangement.

This is extremely important given the fact that pension freedoms have in reality created greater risks for Trustees in meeting  members needs

The continued evolution in DC default design

Bringing in greater investment diversification in the period leading up to the member’s anticipated retirement age

Strategies have become more closely aligned to the principle of an increasingly flexible retirement period, reflecting the fact that for many retirement is no longer an event, and their accumulated assets are likely to continue to be invested long into the member’s retirement years

An increase in the frequency of investment reviews

This often leads to a refinement or, reduction in the number of investment options promoted to members to support members in being able to make a decision. Tying that in with targeted communications to help members plan their journey.

Long-term objectives

Although value for members is only a part of the overall regulation it is at the heart of what trustees do or try to do to get the best outcome for members.  All three of the above improvements aim to improve the overall value members receive from their pension savings. Once boards have got their house in order, it’s time to think about the long-term objective of your scheme and making sure your time is spent on what’s important, not regulatory administration  The employer and the trustees have the opportunity to work together to set a long-term objective, such as:

We give an example of how this has worked in practice in our case study. Download your copy of our pension governance case study here...

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In the next three articles we will talk about where more radical change is needed before taking this step - keep an eye out for those... 

Posted by Jon Webster

Topics: Pensions


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