In the DC world, although individuals are responsible for their own pension decisions, they are not represented at board level. This needs to change, argues Sara Benwell
In the world of trust-based schemes, member representation is relatively simple. Under the Pensions Act 2004 all trust-based schemes are required by law to ensure that at least a third of trustees, or directors of the trustee company, are member-nominated.
However, defined benefit is in decline and while some companies choose to operate a trust-based defined contribution scheme, most new auto-enrolled members will not find themselves saving into one.
Instead, the vast majority of people will find themselves saving into a mastertrust or a group personal pension arrangement. In such schemes, member representation on governance boards is more rare.
Catherine Howarth, chief executive at Share Action, says: “We’re not aware of a single mastertrust or independent governance committee that’s taken the step of putting in a member, or finding a mechanism for electing members or appointing members to the boards of governance arrangements. So we’re in a new landscape, where we’ve lost something that we had before.”
Why does it matter?
The benefits of member representation in the trust-based world have been examined. One benefit, according to Tim Middleton, technical consultant at the Pensions Management Institute, is the increased diversity that MNTs can bring.
He says: “Having a member perspective adds diversity, and diversity prevents the risks of groupthink within boards.
Every board I chair is enriched by having members on it”
“This is because there is a range of different perspectives, experiences and areas that are of interest to members. It’s comforting to members to feel that they have some stake in the management and stewardship of a pension scheme as well.”
Ian Pittaway, chair of the Association of Professional Pension Trustees, adds: “They’re brilliant in so many areas, they ask difficult questions that other people might be frightened to ask, they’re great on member issues, whether it’s changing benefits or a death-in-service case or something like that.
“Every board I chair is enriched by having members on it and it would be a very sad day if we sat there with just professionals running the scheme in a very arm’s-length way.”
Who owns the risk?
It is particularly bizarre that we’ve lost member representation with DC, where members bear all the risk.
In the DB world, as long as a scheme was well governed and well administered, the member would end up with a reasonable replacement ratio. But in the DC world, a member’s outcome depends on a host of factors that are beyond their control.
Essentially, DC pensions are consumer-facing operations, where we fail to allow the consumers to make the decisions – or even ask them what they think.
Pittaway says: “Whether it’s mastertrusts, occupational schemes or contract-based schemes, DC is much more consumerist, but what I’m learning from this world is how little consumer-focused it is.
One of the really worrying features about the UK is that people who bear the risk are not actually freely able to exercise choice”
“We get on doing our stuff – but actually asking the members what they think is value for money or what they want as investment options or what communications would work for them? We’re in the early days of that.”
For example, most members do not have a say over which scheme they are enrolled into. And even if they believe a scheme is not the best possible fit, they are unlikely to be able to transfer without losing their employer contributions.
Howarth says: “The big difference between DB and DC is that employers are choosing the schemes. If you want to get your employers’ contributions you’ve got to go with their choice of scheme. One of the really worrying features about the UK is that people who bear the risk are not actually freely able to exercise choice. And so you have a kind of dysfunctionality in what an economist would say is a functional situation.”
Better member representation could help reassure members that they are enrolled in schemes that are well-governed by boards that have their best interests at heart.
This would also help with the thorny issues of getting people to save more. David Weeks, co-chair of the Association of Member-Nominated Trustees says: “The figures for auto-enrolment show very low levels of contributions, and we need the members to feel willing to jack their contributions up by considerable amounts. If their interests are not clearly visible, they’ll be reluctant to do that.”
Barriers to entry
Unfortunately, introducing member representation into non-trust-based schemes can be tricky.
In the mastertrust world the problems are particularly acute. As most mastertrusts have many employers and even more employees, it is not immediately obvious how selecting members would work.
John Monks, trustee director at Now: Pensions explains: “Now: Pensions has 20,000 clients and 900,000 members. I’m chairman of the member committee there and we are actively trying to think of a good way of dealing with this issue, but we haven’t found it yet.
“I’m not totally convinced in a situation where we are running an election among 900,000 people for a member trustee.”
Some mastertrusts have had success with elections. The Pensions Trust, which started life as a DB mastertrust but has now expanded into DC, has a board made up of 50% MNTs and 50% employer-nominated trustees. These representatives are elected from the pool of companies that use the trust.
Getting members on board
It may also help to demonstrate to members the benefits that taking a trusteeship can have on their careers.
Helen Forrest-Hall, DB policy lead at the Pensions and Lifetime Savings Assocation, says: “I’ve friends who think about being governors of local schools when they have children, and think about being magistrates and other jobs that they can take that are good for their rounded careers. Why wouldn’t being a trustee on a trustee board be a similar thing?”
Shouldn’t we be thinking about paying them for the contribution they put in”
However, the AMNT’s Weeks believes that without payment it will be hard to get people to sign up to the ever-increasing workload of being a trustee.
He says: “One thing that’s beginning to surface is that if these duties are so onerous and we’re expecting people to do 24 days a year, and we say it’s a very responsible activity, shouldn’t we be thinking about paying them for the contribution they put in.”
Howarth agrees: “It’s shabby that people shouldn’t be paid for that role. If you expect people to make a serious level of effort and training and to read their board papers carefully and to take it really seriously… In our world and our culture, expecting them to do that for free is a joke. It’s just not on.”
Unfortunately, even where representatives can be found, there are concerns about whether employers will be happy to foot the bill for employees spending significant amounts of time out of the office.
Howarth says: “I remember when I became a trustee of the Pensions Trust I had to persuade the board that it would be worth their while. It was, because educationally for me it was completely brilliant to be a trustee and it gave me huge learning and insight for my day job. But for most employers that would have been an outrageous thing, to pay for someone else’s employees effectively to get the benefit of that governance oversight.”
Michelle Baddeley, professor of economics and finance at University College London, believes it would help to emphasise the extra transferable skills that encouraging members to take up trusteeships would add to the workplace.
It might need a nudge from the Pensions Regulator or Financial Conduct Authority”
She says: “While there are immediate opportunity costs of losing someone from the workplace for days, the sort of financial literacy they will get, and the networking opportunities, could be made more tangible by making employers aware that having a more knowledgeable, better networked employee is good for the firm as well.”
On the other hand, the fact that many younger members are likely to move jobs within a couple of years means employers are even less likely to allow their staff to dedicate such an extensive amount of time to becoming a member-nominated trustee.
One solution could be for companies to be compensated for the time their employees spend on trusteeship – something that Howarth believes should be paid by the mastertrust.
However, it is unlikely that many IGCs or mastertrusts would be willing to foot the bill to get member-nominated trustees on board.
Pittaway thinks a regulatory shove could help. He says: “I don’t think any insurance company would object to having member representatives, but they’re sort of neutral about it.
“They’re probably not going to go out of their way to make it happen, so it might need a nudge from the Pensions Regulator or Financial Conduct Authority or someone like that.”
And there are other ways that schemes can try to understand and represent members’ interests.
For instance, the Now: Pensions mastertrust tries to gather feedback from its members. Monks explains: “At the moment our main emphasis has been on how do we deal with complaints, how do we deal with keeping people up to date, what is our communication strategy and what feedback arrangements we can get, and how we do respond when we do get feedback.”
The Pensions Trust holds annual member AGMs where members are encouraged to question the trustees about the scheme’s governance.
Howarth believes that increased member engagement can also increase scrutiny, even if the member is not directly involved with the governance of a scheme.
She says: “I think we need to get over this idea that governance is some sort of dead weight cost, and really invest in training. And not just of trustees and member-elected trustees, but potentially of eager beaver members who want to keep an eye on the scheme and ask the right questions and potentially come to things like an annual general meeting.”
Learning from best practice
In the IGC world, one approach that has gained traction is for companies to have governance committees that sit above the GPP – something that both the BP and Tesco scheme have used to great effect.
Even when an employer is using another provider there should be a governance committee”
This approach can give paternalistic employers better oversight of a pension scheme and help ensure that members’ interests are protected. There’s no reason why such a committee could not have members sitting on it.
This is something the PLSA has encouraged. Forrest-Hall says: “We were very strong on the fact that even when an employer is using another provider there should be a governance committee, because there is a role for the employer.
”Members have no choice over that scheme versus another scheme because it will be too expensive to go and choose something else themselves, so it’s up to the employer having made that choice to actually have a role.”
Time for regulation
Whatever the route into better member representation, most in the sector are agreed that it can only be beneficial for the DC landscape. And there is an argument that the new Pensions Bill – intended to regulate mastertrusts better – could be a good place to start.
While the bill is not expected to include anything on a mandatory requirement for MNTs, it is likely to focus on ensuring that mastertrusts are run by ‘fit and proper’ people – and crucially that the barriers to entry are increased.
It seems like a logical place, therefore, for the government to place an emphasis on member representation, and perhaps change some of the barriers that stand in the way of having an effective system.
After all, as Pittaway puts it: “The Pensions Bill will be an obvious opportunity to get some of this stuff in. I can’t understand why it’s important for members to be on DB schemes and we have a whole code, but somehow not on DC arrangements when they’re exactly the same, apart from the type of benefit. What’s the logic there?”