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Sympathy for the devil?

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Halloween is fast approaching, and it’s got me thinking about angels and devils.

Pleased to meet you…

I’ve had a really busy summer, supporting trustees of DC pension schemes in assessing the ‘value for members’ of their scheme’s costs and charges, as well as assisting them in drafting Chair’s Statements. The detailed additional requirements introduced this year have presented trustees with a number of challenges, particularly where data simply hasn’t been made available by fund managers.

Overall, though, I’ve been delighted to see excellent DC governance finally being promoted to members and the positive results achieved by trustees where the results weren’t 100% positive. For the trustees I’ve worked with, if any areas were judged by the trustees as not being good enough for their members, actions were immediately proposed or taken to improve outcomes for those members, such as:

  • Closing down poor-value historic AVC arrangements, replacing them with better/cheaper alternatives;
  • Actively converting with-profits funds into unitised funds, where this was of benefit to members;
  • Reviewing at-retirement needs and support and addressing any issues, such as a lack of understanding of the Money Purchase Annual Allowance

The list goes on. I was particularly proud to be able to use Buck’s powerful bEquipped membership analytics and surveys to help trustees really get to know their members better, make better decisions and take improved actions as a result.

“And I laid traps for troubadours…”

Throughout all of these exercises, it was clear to me that pension trustees – whether lay trustees or professional trustees – can be guardian angels, placing members’ interests at the heart of their actions and decisions. That’s why it was really frustrating to see the obvious distress the trustees were in at being portrayed by the Pensions Regulator as…for want of a better phrase…devils.

There are definitely governance issues that pension schemes and trustees need to grapple with, but it’s been hard for trustees not to take offence when the Regulator has described them as being “asleep at the wheel[1] or “not taking their responsibilities seriously1 and talking about the “vast gap”[2] between how smaller and larger schemes are run.

What’s also not gone down so well with trustees is the suggestion that they deserve their lives being made “more uncomfortable1 – or even “a little bit painful1 – and by implying that receiving a fine from the Regulator means that trustees are “not running their scheme to the right standards of governance1. But this may be what the Regulator is hoping to achieve, with its talk of “agitating1 trustees.

“What’s puzzling you… …is the nature of my game”

It’s therefore interesting to note that, in the first half of 2019, five of the largest master trusts in the UK were fined by the Regulator for non-compliant Chair’s Statements and ‘named and shamed’ by the Regulator on their website[3]. These schemes cover a staggering four million members.

Even ignoring NEST (the biggest DC pension scheme in the UK) and the Universities Superannuation Scheme (the biggest hybrid pension scheme in the UK), the remaining three master trusts still cover over 350,000 members. I may be naïve, but I’ll put my hands up and say that I certainly didn’t expect this news.

The regulatory approach to Chair’s Statements definitely had the potential for unwelcome surprises, though. The guidance is more principles-based than rules-based, but the fines for non-compliance are mandatory (with very little practical ability to appeal). As a professional trustee said to me:

It’s like being told to drive safe, to drive within the speed limit – but you’re deliberately not told what the limit is. You can be the safest and most careful driver on the road, but still receive points and a fine!

Might there be unwelcome implications from this regulatory approach and the recent news? Some trustees may wonder about the point of attempting to produce a compliant Chair’s Statement – if it is quicker and cheaper to draft a poor Statement and take a fine than prepare a high-quality Statement and still pick up a fine anyway?

If there is a ‘vast gap’ between how smaller and larger schemes are run and the UK’s biggest and best master trusts can’t produce compliant Chair’s Statements, even with their substantial resources and access to top-tier advisers, then how could smaller schemes ever guarantee a pass?

In addition, the number of fines for not submitting Chair’s Statements is already three times higher than the number of fines for non-compliant (but submitted) Statements. This trend may continue, or even worsen.

“I saw it was time for a change…”

That’s not to say there isn’t a need for improved overall governance of DC pension schemes. In my experience, though, the revised ‘value for member’ assessments and Chair’s Statements are already producing powerful positive outcomes for members and, in a lot of cases, are merely extending or even just better recognising the good work that trustees are already doing.

That said, there are a lot of pension schemes out there that would definitely still benefit from either a ‘tough love’ or ‘gentle hand’ approach from the Regulator. Removing barriers to consolidation and improving diversity on pension scheme boards may also prove helpful in improving overall governance. The Regulator has just closed a very timely consultation on the future of trusteeship and governance[4] that contains some very forward-looking ideas about these and other topics.

There is a risk that some very good schemes now need to have their relationships with their members – and their wider reputations – repaired. And it’s hard not to worry that 4 million UK savers may now be concerned about their pension schemes, if they were to read about the fines for their trustees and the messaging around this.

Four million members is huge compared to the 200,000 members in the 32,000 smaller schemes that the Regulator says it wants to target with its new regulatory interventions and messages of “improve or consolidate”[5]. So, it’ll be interesting to see what the Regulator does next.

“Have some courtesy, have some sympathy…”

I value the good work performed by the Pensions Regulator but I certainly don’t envy them right now. It’s the role of a regulator to promote trust and confidence in the markets that they regulate.

Improving overall governance levels by targeting underperforming schemes definitely makes sense. Having high-quality schemes labelled as underperforming because they fail to meet standards that might not be clear enough – and members potentially losing confidence in their DC pension schemes as a result – does not.

So how can we help differentiate between the angels and the devils?

  • First, I would welcome more transparency around the process that the Regulator uses to assess Chair’s Statements and more reporting of the outcomes of these assessments. The Regulator’s guides are very helpful but more visibility of the explicit criteria used to assess compliance would give trustees a much better indication of the ‘speed limit’ and a much clearer idea about whether their efforts are likely to lead to a pass or a fail. Those who did then fail would then be much more likely to deserve any fines and increased scrutiny.
  • Second, I would love to see stronger messaging about the benefits which are arising from the increased governance requirements, which would promote the ‘angelic’ work of trustees with their members.

If anything, though, let’s lose the labels! I think that all of us – members, trustees, regulators, advisers, whoever – probably have both demons and angels on our shoulders, but maybe recognising that we’re all more human, than angel or devil, would help.

And with that, have a happy Halloween!

[1] https://blog.thepensionsregulator.gov.uk/2019/07/02/why-were-pushing-pension-schemes-out-of-the-market/

[2] https://www.professionalpensions.com/opinion/3080450/david-fairs-trustees-tremendous-responsibility-expect-knowledge-understanding

[3] https://www.tpr.gov.uk/en/document-library/enforcement-activity/penalty-notices

[4] https://www.thepensionsregulator.gov.uk/en/document-library/consultations/future-of-trusteeship-and-governance-consultation

[5] https://www.thepensionsregulator.gov.uk/en/media-hub/press-releases/badly-run-schemes-need-to-improve-or-consolidate

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