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OPDU Report 26 October 2009 Advisory Service Forum In our experience, the majority of trustees are doing a good job. As the regulatory environment has increased and as the Pensions Regulator (“tPR”) has issued more guidance, most trustees have responded positively and tPR has acknowledged improvements in governance. This is a major step towards increasing members’ confidence in pension schemes and towards trustees taking full and proper control of the schemes for which they are responsible. However, trustees must not be complacent, especially in the current environment. It is essential that good governance continues and that processes and procedures develop in response to changing circumstances. The approach to the employer covenant is particularly important at the current time, but this must be balanced with the need for trustees to demonstrate to the employer their good governance of the scheme and the efficient use of the resources at their disposal. Employer covenant review – one sideof the coin In the last 12 months the tPR has issued several statements to trustees and employers providing guidance on the issues that need to be considered in a difficult economic environment. As well as highlighting a higher risk of fraud, the main focus is on funding and the need for trustees to under-stand the impact that the economic climate might have on the employer. Trustees cannot properly agree the Technical Provisions and a recovery plan without understanding the employer and its ability to pay the required contributions. It is essential that the trustees know how the employer’s business is weathering the current economic storm so that any required action can be taken in good time to protect the members’ benefits. This information is usually obtained as a part of a formal covenant review. This can be undertaken by the trustees or an independent person. The key objective of such work is that, whoever does the work, there is a detailed consideration of the employer’s business and an assessment of its forecasts. Trustee governance review – the other side of the coin As the trustees obtain information about how the employer is operating its business, it is reasonable that the employer should want to know how well the scheme is being run. After all, it will be the employer that pays for any inefficiency. Trustees should, therefore, be prepared to demonstrate the strength of their governance. The term ‘governance’ can mean different thing to different trustees and it is not always easy to pin down exactly what needs to be done. To assist trustees in reviewing governance, it may be broken down into six key aspects:
Under each of these headings, there are a series of issues for trustees to consider such as: Board effectiveness - board members need to consider whether the board as a whole has the required skills and knowledge to achieve their objectives and get the best value from their advisors. Assessment of advisors – as well as considering compliance with Key Performance Indicators (“KPIs”) trustees must establish whether the KPIs are effective. For example, KPIs should cover accuracy as well as the time taken for specified activities. Relationship with the employer - in the current environment, as already highlighted, this is likely to focus on the strength of the covenant, but other aspects of the relationship such as conflicts of interest should not be ignored. Risk management and controls - trustees need to regularly review the key risks faced by the scheme as they will change as the economic environment changes. As tPR has indicated, difficult economic conditions do increase the risk of fraud. It is, therefore, essential that controls are continually monitored to ensure that they remain relevant and effective. Compliance with legislation - under this heading, trustees need to consider the Trustee Knowledge and Understanding requirement. It is also important to remember that compliance with legislation does extend to the trust deed and rules. Communication strategy - the trustee board needs to consider all aspects of communication. There should be a regular and open dialogue with the employer. Members concerns about their future security should also be addressed. Individual trustee boards need to decide how to communicate the effectiveness of their governance to the employer. As referred to above, there should be regular and open dialogue between the trustees and the employer on a range of matters and this in itself should provide the employer with much of the information that is needed. Complex reporting structures should be avoided as these are unlikely to be efficient or effective. Value for money Good governance helps trustees to maintain a good relationship with the employer, maximise the funding position of the scheme and get the best value from their advisors. It is essential in the current economic climate and trustees need to be continually reviewing what they do to ensure that there are no unexpected events. Bob Hymas |
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