Governance in pensions
14/05/2009
Challenging times
At the Baker Tilly conference in April 2009 over 200 delegates were asked a series of questions about confidence in pensions. The results were:
- 73% believed that the general public were more interested in pensions than five years ago;
- 100% felt that the public’s confidence in the pensions industry had declined compared to last year;
- 93% ranked the promotion of good scheme governance as very important or critical.
We believe that confidence in pensions must be improved and key to this is the demonstration of good governance by trustees. An important element to this in the challenging times we are all experiencing is the robust assessment of the employer covenant. This view is supported by the Pensions Regulator (tPR).
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In October last year, tPR issued a statement to trustees providing guidance on the issues trustees needed to consider in a difficult economic environment. Included in that statement was the comment:
“Where an employer believes that an existing recovery plan is at serious risk of jeopardising the company’s future development or solvency that will be a matter for discussion with the trustees.”
At our conference, when asked if the trustees should consider flexibility in the recovery plan in the current economic climate, 90% said “yes”.
However, trustees cannot properly agree the recovery plan without understanding the employer’s ability to pay the required contributions. This information is usually obtained as a part of a formal covenant review. In undertaking such a review, there will be a detailed examination of the employer and an assessment of its forecasts. But surely, to maintain a balance, the employer has the right to challenge the trustees.
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Trustees should be prepared to demonstrate the strength of their governance. It is, after all, the employer that is likely to be picking up the cost of any inefficiency.
The term ‘governance’ can mean different things to different trustees and it is not always easy to pin down exactly what needs to be done. To assist trustees in reviewing governance, it may be broken down into six key aspects:
- Board effectiveness - board members need to consider whether the board as a whole has the required skills and knowledge to achieve their objectives and get the best value from their advisers.
- Assessment of advisors – as well as considering compliance with Key Performance Indicators (KPIs) trustees must establish whether the KPIs are effective. For example, KPIs should cover accuracy as well as the time taken for specified activities.
- Relationship with the employer – in the current environment, as already highlighted, this is likely to focus on the strength of the covenant, but other aspects of the relationship such as conflicts of interest should not be ignored.
- Risk management and controls - trustees need to regularly review the key risks faced by the scheme as they will change as the economic environment changes. Controls also need to be continually monitored to ensure that they remain relevant and effective.
- Compliance with legislation – under this heading, trustees need to consider the Trustee Knowledge and Understanding requirement. It is also important to remember that compliance with legislation does extend to the trust deed and rules.
- Communication strategy – the trustee board needs to consider all aspects of communication. There should be a regular and open dialogue with the employer. Members’ concerns about their future security should also be addressed.
Individual trustee boards need to decide how to communicate the effectiveness of their governance to the employer. As referred to above, there should be regular and open dialogue between the trustees and the employer on a range of matters and this in itself should provide the employer with much of the information that is needed. Complex reporting structures should be avoided as these are unlikely to be efficient or effective.
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We believe that confidence in pensions will be restored by trustees taking control. Good governance is critical to taking control as it helps trustees maintain a good relationship with the employer, maximise the funding position of the scheme and get the best value from their advisers.