UK trade association the Pensions and Lifetime Savings Association (PLSA) has published a white paper urging pension regulators to concentrate on the knowledge and experience of boards and committees rather than focusing on regulation.
The PLSA argues that while there are a wide range of regulations setting out expectations of boards and committees, they are largely concerned with dictating specific procedures that plans must follow. Instead, it said, The Pensions Regulator (TPR) should ensure that those running the boards and committees are appropriately qualified, and are able to act in the way most suitable to their particular plan.
According to the paper, running pension plans effectively requires expertise in technical areas such as financial, legal, and actuarial matters, as well as more general skills such as commercial acumen and communication skills.
“To achieve this, we need a bold but not implausible shift in the way we regulate governance,” said the PLSA in its paper, “from process to people, achievable within the existing legislative framework, and capable of bringing about a real and necessary improvement in standards.”
The paper points to 22 pieces of regulatory guidance from TPR, which it says are confusing for pension governance bodies, and can lead to misdirection of energies towards compliance with procedural requirements, and away from the strategic decisions shaping the long-term success of their pension plan.
“This approach has been unsuccessful,” said the PLSA, “and while welcome steps have been taken towards clearer, simpler governance guidelines, further progress is needed.”
PLSA said that TPR’s own research has shown highly varied standards of governance, “with only half of surveyed schemes saying all their trustees meet standards set out in the Trustee Knowledge and Understanding (TKU) Code of Practice,” said the PLSA, “while 24% say they never disagree with external advisors and 58% say they ‘rarely’ do so, hinting at a lack of capacity to challenge expensive advice.”
According to the paper, key characteristics of effective boards or committees include:
- Collective knowledge of the technical areas relevant to pension fund administration, such as investment, legal, and actuarial matters.
- General skills, such as an ability to communicate effectively, and commercial acumen when dealing with external advisers.
- Cognitive diversity, through board or committee members with a range of different backgrounds and perspectives.
- Access to executive support for the day-to-day running of the pension, enabling the governance body to concentrate on key strategic decisions.
“When DC schemes fail to achieve good value for members because of poor investment returns, excessive costs, and charges or poor administration performance as a result of poor governance, savers also suffer,” said the paper. “Both of these scenarios lead to lower incomes and a lower quality of life in retirement than ought to have been the case. It is, therefore, vital that governance bodies are properly equipped to fulfill their responsibilities.”