Pension scheme governance – still a work in progress

Pension scheme governance is a topic which has created it’s own industry within an  industry. The one certainty is that there is no “one size fits all” solution to how a pension scheme works effectively and efficiently.

There is some current noise around the theory that a closed DB or DC pension scheme should be able to operate with a smaller trustee board than an open scheme. The theory is that the scheme is on the road to wind up and therefore should be more easily managed than an open scheme looking at issues including employee benefit levels. All this is true. But in CBC’s experience closed schemes share many of the same issues as open schemes, not least the question as to whether the Principal Employer is going to able to contribute to the Scheme until such time as they are in cheque writing distance of a transfer of liabilities to an insurer. 

From this, the question is whether a trustee board has the necessary skills, the time, the experience, the tools and the desire to keep on running down the road of managing a scheme of which they may not be members and takes them away from the day job which may be under review anyway. For many, it’s not a positive career move. 

It’s no surprise then that independent trustees are sometimes seen as a potential solution to this problem. However, more schemes don’t have an independent trustee and rely on their advisers instead. This can work well, but there are occasions where the advice does not fit the question being asked by the trustees. This is certainly true of smaller schemes, but larger ones (say £500m +) are by no means exempt of this disease. 

We are still surprised by the number of schemes without a proper business plan, not just a diary of the next three years events, a risk register which is a tick box exercise not a proper review of the risks which the trustees can control, rather the ones they can’t, lacking proper terms of committee reference clarifying powers (advising the trustee board or making decisions on behalf of it). Most of all, trustee boards without any scenario planning, for example what happens if the Principal Employer is the subject of a hostile takeover, what triggers should be used when valuing assets against liabilities. The same levels of governance of companies needs to be applied to pension schemes. 

I’m simply saying, that rather like English rugby after the tour of Argentina, there are some promising signs, but there is still much to be done and that requires us an an industry to engage both with trustees and scheme sponsors to improve the game.

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