Estimated reading time: 4 minutes
We all know that good governance is important. Unfortunately though, it’s easy for poor governance to masquerade as being ‘good enough’. This blog aims to demonstrate some of the governance-related risks that trustees may be taking without even realising, and to show how applying 21st Century Trusteeship standards can help.
Let’s consider a fictional scheme with four trustees. The chairman of trustees is the HR director of the parent company. The parent company has had a tricky time recently, but everyone is confident that things will start to improve soon. Relations between the trustees and parent company are good.
Nothing unusual here, although of course the parent company’s situation is a concern. Let’s face it though – this is pretty common.
Let’s now drill down a little further. The HR director is a confident individual and the other trustees feel comforted by his chairmanship. The other trustees are the deputy HR director, and two members. The trustees meet four times a year, with agendas and hard copy meeting packs drawn up by their advisers. Minutes of every meeting are drafted by advisers, and agreed and signed by the trustees at the following meeting. A signed copy is stored by the chairman of trustees in his minutes file.
The trustees have recently reviewed their administrators and appointed a small firm who provided by far the cheapest of the quotes they received. They are pleased to be able to save some money.
At this level, things might still sound OK. The trustees are making significant use of their professional advisers and have a strong individual as part of their team. Of course they could do more on governance, but the chairman thinks it really isn’t necessary for this size of scheme and the other trustees feel “he’s the expert” so are content.
Let’s now be completely honest about a couple of things that no-one is brave enough to mention. Unfortunately the trustees are a little too reliant on their chairman. They don’t fully understand everything that is said at trustee meetings, but tell themselves that that’s only to be expected really - pensions are so complicated! Also, some people travel to the meetings by public transport, carrying their confidential meeting packs. They know this isn’t ideal, but what can you do?
Now let’s wind forward the clock a few years and imagine that a number of things have happened - in particular:
- The HR director who was the chairman of trustees has left the employer under a cloud and resigned as a trustee.
- The minutes file cannot be found. The former chairman insists it’s at the offices of the employer and will say nothing more. The new HR director (formerly the deputy) cannot find it and other senior people at the firm are completely unsympathetic. Their view is that as he was a trustee all along, he should be able to sort things out.
- One of the advisers has left a meeting pack on the train. Unfortunately it contains confidential information about both the employer and some members.
- The employer is in severe financial difficulties, and relations between the employer and the trustees are very difficult. The employer has challenged certain historic decisions that it believes may not have been made correctly and the remaining trustees don’t even know when the matters were discussed.
- The services of the administrators have proved to be disappointing. They have made many mistakes which are extremely costly to sort out, especially when the Pensions Ombudsman has become involved.
Would you want to be in the shoes of the remaining trustees? Of course I have painted a very black picture to prove a point, but we have seen all of these situations in one guise or another.
Many of the problems have arisen because the trustees’ approach to governance was too ‘light touch’. Superficially it looked acceptable, but the reality was different. Effectively the trustees were assuming that nothing would go wrong. They may not have realised it but, in doing so, they were taking significant risks.
Had the trustees taken The Pension Regulator’s 21st Century Trusteeship guidance seriously, their position would have been significantly improved. For example:
- The trustees would have properly analysed their knowledge and understanding and taken steps to get additional training in areas where this was deficient.
- After reviewing the structure of their trustee body (and their conflicts and interests), the trustees would probably have decided to change its rather unbalanced make-up.
- Assisted by the comments made about advisers and service providers, the trustees would have scrutinised the administrators more carefully prior to their appointment. They may well have established that, although they were cheap, they were not fit for purpose.
- The trustees may have concluded that a cyber-secure electronic filing system and action logs, to help them in the future pinpoint when decisions were made, were a necessary requirement of 21st Century Trusteeship good governance standards.
Essentially, taking governance seriously and applying the 21st Century Trusteeship standards would have stopped the trustees from relying on assumptions they may not even have realised they were making. The HR director would remain in place, the minutes file would not be lost, the cheap administrators would do a good job etc.
Of course, better governance would not have been able to stop a key employee or trustee leaving. It would, however, have lessened the resulting impact. Better governance would not have improved the lot of the struggling employer, but it would have enabled the trustees to focus more on dealing with this extremely worrying situation. To put it another way, if the trustees had not just assumed that everything would be fine in relation to the matters that were under their control, they would have been better placed to deal with the matters that weren’t.
Is your scheme governance really good enough? Or are you instead taking a relaxed approach and assuming nothing will go wrong? If the latter, I recommend you assess your scheme against the 21st Century Trusteeship standards before it’s too late.
Stay up to date
with the latest independent commentary and exclusive insights from a range of experts at the forefront of risk, pensions, investment and insurance – tailored to your preference.subscribe today