Improving standards of governance across the workplace pension sector has been a major focus for both regulators and the Department for Work and Pensions.
But where does governance now rank in advisers’ and consultants’ scheme selection matrix?
Consultants say that while other factors may have equal or greater priority, governance remains an important determining feature for selection.
Buck head of DC and wealth Mark Pemberthy says: “We look at a number of elements, including the level of diversity of skills and backgrounds within the governance group whether that be master trust trustee board or IGC. A key element of comparison is their output. How are they evaluating performance through the chair’s statement/IGC report and to what extent are they influencing change with the provider?”
So what do consultants look for when sizing up a provider’s governance capabilities?
Laura Andrikopoulos, head of governance consulting, at Hymans Robertson says: “We look at a range of metrics. The composition of the board is of course important – for example, size of the board, experience of the board, collective effectiveness as shown by the mix of skills and diversity, the level of independence from the provider demonstrated by the composition. We would also consider whether the board has undertaken regular effectiveness reviews and what the outcomes have been, and how the board has demonstrated its mettle during tough periods – Covid being a good example.
“We would consider the governance processes and structures in place, for example, the risk management approach. Other important aspects are the relationship of the governing body with the provider and to what extent the governing body has true influence and independence. Furthermore, the support to the board is crucial – the quality of secretarial and governance advice and support in place. The assessment of all of the criteria above would allow us to come to a synthesised judgement on the quality of the governance board as a whole.”
Pemberthy says governance will usually not be the deciding factor in provider recommendation, but in exceptional circumstances it can be make or break.
“It is a consideration but not generally a defining factor in the way that core functionality, commitment to market, investment capability and communication are. But if there are indications that the governance board are pushing for improvement, and this is not being actioned by the provider then that would be a significant negative consideration.”
Andrikopoulos says: “When selecting a new DC pension provider, governance is a key consideration, albeit one that can sometimes be overshadowed by what seem to be more obvious features like the headline pricing or current investment strategy in the default fund. However, good governance is key to the future protection of members since a company selecting a new provider is buying into the quality of the governance that will be the means by which future changes and innovations are agreed in the scheme. An example would
be the governance body stepping in to make changes to an investment strategy that isn’t working, or to develop more effective communications or replace an administrator who isn’t providing good quality service. Governance is the means by which proper oversight of a pension arrangement for members is achieved and as such needs to be an important part of any selection.”
The view from one master trust is that governance is increasingly a factor in the selection process. Tony Pugh, EMEA head of DC Solutions at Aon has responsibility for developing and managing the Aon master trust.
He says: “It has emerged in the last 18 months with a lot more focus. When we are responding to tender requests from third party evaluators (TPEs), we often get questions about governance around what experience trustees have and how they interact with the founder.
“And then we are being asked either that the prospects have a separate session to talk to the trustees or that we include the trustees in the pitch. I would say all of that has developed in the last 18 months.”
He is very comfortable with the process. “It is the right thing to do as trustees have an important role in the operation of the master trust. Basically all TPEs now ask about this.
“It is absolutely right that we have a body that sits there as a reminder that this solution is for real people. Most providers are very good at remembering that, but trustees add in that extra dimension – their only role is to protect the member.”
Pugh says that one key area is around diversity. “Our view is that cognitive diversity is incredibly important. The blend of the trustees should come from varying experiences that are relevant to the delivery of a solution to the member. They should be able to cover communications, administration, member engagement, investment across the group of trustees. I also think it is important trustees are professional and have relevant deep expertise. By virtue of that they are much better able to constructively challenge the provider and add value and they are adding their expertise to the expertise of the provider to provide a better outcome for the member.”
“Yet more than professional, they should be independent. If you have in-house trustees, there are obvious conflicts. I don’t think that is necessary with a scalable large entity such as a master trust.”
He also suggests that a lot of new regulation and initiatives are pointing towards requiring more specialist knowledge – including ESG, the push towards more illiquid investments and TCFD requirements favouring schemes with trustees that have a lot of DC and investment experience and a massive challenge for schemes that lack it.
Of course, there is an argument to say that with reforms requiring authorisation of master trusts, a basic standard of governance should be taken as a given.
PTL managing director Richard Butcher says: “My starting position is that good governance is good governance. You can have good governance or bad governance, but you can’t really have better governance. In a sense, providing a scheme meets those criteria, the quality of governance isn’t going to be a deciding factor in which master trust you go to. In all authorised master trusts, the regulator has vetted the standards and procedures and set up of the master trust board.”
However, Butcher says, there are supplementary factors which echo the views of consultants above.
“The supplementary point is why would governance be a distinguishing factor – the views and values of the governance body should align with those of the selecting employer in so far as they can check these things. So, what I mean by this is it is the subjective judgment of the employer – does the trustee board approach these matters in a way that I feel comfortable they should be approached.”
He also gives the example of ESG. “The approach that one board takes to ESG may vary from the approach another board takes because one may take the view it can have a nominal impact on climate change and approach investment that way, another may take the view it can have a significant impact on climate change and approach it that way. Neither is right or wrong, but an employer may prefer a governance board who are more assertive when it comes to investing in a climate aware way.”
Flavour of governance
He says the same may apply to matters of diversity and even the approach to dealing with member complaints.
“It is about finding the flavour of governance the employer is comfortable with,” he adds.
When asked what the failures of the past tell us about the importance of good governance today, Andrikopoulos adds: “In the broadest sense many corporate failures that have impacted pension schemes are a result of poor governance, particularly poor culture within an organisation, and cultures which do not value good governance as a good in and of itself. Ensuring robust governance is maintained in schemes or master trusts, with strong trustee boards that exhibit the appropriate degree of both separation and collaboration with scheme funders and strategists will be key to ensuring this remains the case.
“Trustee boards must have sight of all information needed to undertake their roles properly and consist of individuals who are unafraid to challenge and take a different view from the provider when necessary whilst also being people who can recognise the benefits of close collaboration when this is appropriate. Choosing the right people for the governing body and having transparent and robust governance structures in place alongside a healthy culture of debate and challenge are key elements of success.”