Pensions: the seven priorities

Jun 27, 2007

PENSION scheme trustees have become so beleaguered by warning after warning from their professional advisers and the Pensions Regulator of the dire impact of different regulations that it has created a ‘white noise’ effect.

No warning seems more important than another and it is increasingly difficult to know which way to turn.

The only way to address this is for trustees to have a real understanding of the fundamental issues. They should be able to decide for themselves what warnings they should heed most.

That is not to say that trustees should not listen to their professional advisers nor to the Regulator. However, they must be able to make informed judgements about how the advice and guidance affects their scheme and their members.

I was delighted when the Regulator issued the Corporate Plan 2007-2010 last month, in which it states that one of its key priorities was to improve governance of work-based pensions via a year-on-year improvement in the extent to which trustees demonstrate knowledge and understanding of governance requirements.

Another priority in the Corporate Plan is to strengthen defined benefit scheme funding by completion of scheme-specific valuations and agreed recovery plans for schemes in deficit. There is also the aim to reduce risks to members of defined contribution schemes via increased understanding by trustees and others involved in running such schemes.

It is clear that the Regulator’s objectives crucially depend on good governance and trustees’ understanding.

But, governance is boring, isn’t it? And it doesn’t grab headlines the way that ‘Multi-million £ deficit’ or ‘Thousands lose jobs and pensions’ does. However, it is good governance that provides the best prospect of ensuring that those types of headlines appear less and less.

Last month, the Regulator published a discussion paper on governance, the executive summary to which neatly collated the key issues for scheme members and trustees.
The paper sets out seven priorities for scheme governance, the first of which – perhaps obviously – is knowledge and understanding.

The second priority concerns conflicts of interest and it is hugely important that trustees are able to identify conflicts and have policies and protocols in place for handling them.
The next priority is the monitoring of the employer covenant and an understanding of the covenant is regarded as essential, particularly in the context of technical provisions and recovery plans.

The key here is understanding the covenant. Simply monitoring it is not enough.
Another priority concerns the processes for investment choice and the discussion paper points out the indisputable fact that poor investment returns can lead to lower members’ benefits, increased costs to the employer or both.

Other priorities include good administration, particularly in DC schemes, and governance during wind-up, with the aim of ensuring that the key activities of winding up a scheme are completed within two years.

Finally, the paper talks about relations with advisers, recognising that expert advice is essential but that risks of conflict arise where advisers work for both the trustee and the employer.

Trustees are counselled to ensure that advisers are suitably qualified for the issues they are addressing and are recommended to challenge the advice to test that it is robust and applicable.

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