Governance failings are most acute among small scheme trustees, new research from the Pensions Regulator reveals

Small scheme trustees could find themselves on the endangered species list as The Pensions Regulator (TPR) searches for the ultimate pensions governance model.

TPR’s chief executive Lesley Titcomb says the proliferation of small schemes presents a governance challenge, and it is the larger trustee boards that boast the better examples of trustee knowledge and understanding (TKU).

As part of its quest to determine what an effective 21st century trustee looks like, TPR surveyed 816 trustees, the results of which were published at the end of October.

The results were stark; 15% of trustees had failed to meet any of the TKU requirements.

The failings were most acute among small schemes. While two-thirds of all respondents claimed to meet the minimum trustee knowledge and understanding (TKU) standards, only 38% of small schemes said the same.

Not of the first time the industry has to ask whether trustee boards, particularly those reliant on non-professionals, are cut out for the task.

The future for traditional trust-based schemes is most questionable in DC schemes.

“It is important to recognise the strengths and skills that individual trustees bring to the board”

Eighty-six per cent of plans set up under auto-enrolment regulation were contract-based, and where employers did opt for a trust-based DC arrangement 94% chose a master trust.

Paul Leandro, partner at Barnett Waddingham, says: “We are continuing to see a lack of appetite amongst lay trustees to retain their DC responsibilities. Momentum is continuing to build around trust-based scheme closures, and with the blessing of trustee boards, more and more employers are choosing instead to use contract-based or master trust schemes as the going concern.”

The problem for the regulator is in attempting to improve governance without trampling all over centuries of established practice. Further, plenty of lay trustees are doing an exemplary job and it would seem churlish to get rid of years of experience, just to tackle disappointing governance in the minority of cases.

Jonathan Reynolds, client director at Capital Cranfield Trustees, says: “It is important to recognise the strengths and skills that individual trustees bring to the board. If well chosen, lay trustees can bring specific and relevant knowledge and experience to a trustee board.”

It may be that in establishing the ideal model for a 21st century trustee, TPR could do worse than look to the contract-based world.

Newly created independent governance committees (IGCs) oversee insurance companies’ pension schemes, and are made up of carefully selected individuals with proven experience in a range of relevant disciplines.

And while IGCs are not bound by the same rules and complexities as trust boards, this simple model looks like a possible example of how trustee boards could be constructed.

But this model suggests dedication, expertise and resources that may be beyond the scope of many schemes, irrespective of size.