UK Pension fund governance and its regulation could learn lessons from corporate governance according to a discussion paper produced by the Pensions and Lifetime Savings Association (PLSA).
The PLSA argues that the regulation by The Pensions Regulator (TPR) is currently over-complicated and focused on prescribing in minute detail what pensions governing bodies should be doing. The PLSA said this approach is characteristic of the challenge of regulating a fragmented sector. The PLSA said TPR’s online document library currently hosts 22 pieces of regulatory guidance; 14 codes of practice; and seven pieces of code-related guidelines but the current attempt to manage schemes from the centre by mandating the individual processes that schemes undertake, had not delivered the necessary improvements.
The discussion paper suggested that the approach needed to change and instead focus on the inputs that go towards producing good governance particularly improving the skills and knowledge of trustees and other involved in pension schemes.
TPR research has shown highly varied standards of governance, the PLSA said, with only half of surveyed schemes saying all their trustees meet standards set out in the Trustee Knowledge and Understanding (TKU) Code of Practice, while 24% said they never disagree with external advisors and 58% said they ‘rarely’ do so, hinting at a lack of capacity to challenge expensive advice.
Therefore improvements needed to be made in the collective knowledge of the technical areas relevant to pension fund administration, on issues including investment, legal and actuarial matters; developing general skills, such as an ability to communicate effectively and commercial acumen when dealing with external advisers; ensuring cognitive diversity, through board or committee members with a range of different backgrounds and perspectives and by providing access to executive support for the day-to-day running of the scheme, enabling the governance body to concentrate on key strategic decisions.
Getting pensions governance right is important as the PLSA pointed out that the assets under management of the largest pension funds and the number of people dependent on them are similar to major corporations and financial services firms. However, currently, the regulations governing listed companies and the financial services sector enjoy a higher level of prominence as guidance on appointments to key governance positions than any equivalent guidelines for pension funds.
This is demonstrated, the PLSA said, by public and media interest in (and scrutiny of) breaches of the corporate governance code at large companies or appointments to leading positions in the financial services industry. In the pensions fund sector, breaches of TPR’s codes and guidance and appointments to governance positions attract little public attention, the PLSA said although the quality of governance personnel is debated retrospectively if a major failing occurs.
Joe Dabrowski, head of governance & investment, at the PLSA, said: “The most important ingredient of good governance is the people who provide it. Pension schemes are affected by the fortunes of their sponsors and the wider economy so cannot guarantee success, but governance bodies that are expert, effective and diverse give them the best possible chance of success.
“Currently the regulation of the pensions industry is characterised by a strong focus on outputs. There is a wide range of different regulations setting out expectations of boards and committees, largely concerned with process rather than with ensuring that governance bodies are appropriately skilled. These regulations set out a confusing array of rules for pension scheme governance bodies to get to grips with.
“Regulatory oversight should instead focus on ensuring the right people are appointed to governance positions and let them take decisions in the best interests of their scheme. We believe this would deliver the high standards of governance necessary to give pension scheme members security and confidence in their pension fund.”