The huge expansion of pensions under auto-enrolment has created a far more diverse membership base — and regulation is only starting to catch up.
Describing the shift, Aviva head of savings and retirement Alistair McQueen says: “Automatic enrolment has been a huge boost to pensions diversity, equity and inclusion. In little over a decade, we have moved from a world where one in 10 employers were providing workplace pensions, to a one where it is now 10 in 10. Accessing workplace pensions is no longer a world of haves and have-nots. And amongst employees we have seen a huge closing of the pension participation gap between ages, genders, earners, and ethnicities.
“Bluntly, workplace pensions used to be the domain of older white male professionals. Positively, this is no longer the case. Our work, however, is not done. The spotlight has rightly moved from participation to adequacy. The gender pensions gap and the ethnicity pensions gap remain a concern. In the world of pensions diversity, equity and inclusion, adequacy is our new front line.”
Department for Work and Pensions figures underline these points. Automatic enrolment scheme participation among eligible employees increased from 56 per cent in 2013 to 87 per cent in 2021.
But disparities in participation rates remain. The lowest participation rates are currently among those of Pakistani and Bangladeshi heritage, with just 66 per cent of eligible employees enrolled in a workplace pension, although this is a significant increase on the 35 per cent enrolment rate back in 2013.
Regulators are looking to address some of these issues. The Pensions Regulator is focused on trustees and trustee boards. The FCA and Prudential Regulatory Authority are consulting on new rules for financial firms while company reporting and listing rules are also tightening.
Interestingly, the two main regulators have been practising what they preach for some time now. Both have had diversity and inclusion strategies for their own organisations for several years.
Indeed, part of the rationale from TPR for its own DEI approach acknowledges the importance of auto-enrolment to the story.
The introduction to its corporate strategy covering the years 2021 to 2025, said: “With the explosion of the number of people saving for their retirement as a result of automatic enrolment, those savers we protect have become an increasingly diverse group. Improving diversity and inclusion is fundamental to [our] goals and when we say we want to put the saver at the heart of all that we do — that means all savers.”
It also gave a clear definition of the groups covered. “We have a responsibility to explore issues that may disproportionately impact different groups such as ethnic minorities, women, people from the LGBT+ community, people of all socio-economic status, people with physical and mental health conditions and disabilities, and those who have caring responsibilities.”
In July this year, TPR launched a survey of the UK’s 97,000 trustees and board members. Although the full results are yet to be posted, TPR confirmed when launching the survey that fewer than one-in-five schemes (17 per cent) formally obtained and recorded any diversity data in relation to their trustees in 2022 although this was, at least, a slight increase on 2021’s 14 per cent.
Regulation may change this. In March, TPR issued guidance for both pension scheme governing bodies and employers.
TPR made a series of suggestions including that schemes have an equality, diversity and inclusion (EDI) policy covering an agreed definition of EDI, set out EDI aims for the governing body and create an EDI training plan.
It said governing bodies should regularly review their diversity of life experiences, expertise and skills, widen the pool of candidates beyond senior management positions, offer training and adopt fixed terms of between three and five years for member-nominated trustees.
It added a section to its existing guidance on communicating and reporting for DC schemes urging them to consider the diverse range of backgrounds, needs and vulnerabilities of their savers.
Employers received related parallel guidance including a suggestion that they could join up their work on scheme diversity with ‘with other EDI initiatives you may have in your organisation. Indeed, for companies, both financial and broader businesses those other initiatives may also be hardening into requirements.
In 2022, the FCA finalised rules requiring listed companies to report information and disclose against targets on the representation of women and ethnic minorities on their boards and executive management, from the accounting period April 2022.
The ‘comply or explain’ targets were as follows:
- At least 40 per cent of the board should be women
- At least one of the senior board positions (chair, CEO, chief financial officer or senior independent director) should be a woman
- At least one member of the board should be from an ethnic minority background.
Separately, in a mini-review of 12 large financial companies published late last year, the FCA found the “most developed strategy revolved around gender, most likely due to the availability of data and external target focus”. Other characteristics had “comparatively light emphasis put on their significance and strategies”.
The FCA has now launched a consultation paper entitled “Diversity and Inclusion in the financial sector – working together to drive change”.
This ambitious paper wants to encourage “healthier firm cultures, reduced groupthink, new talent unlocked and greater understanding of, and provision for, diverse consumer needs.”
Larger firms with more than 250 employees will have to report their average number of employees to the FCA on an annual basis, collect, report and disclose certain D&I data and establish, implement and maintain a D&I strategy, determine and set appropriate diversity targets and recognise a lack of D&I as a non-financial risk.
Assessing the current regulatory initiatives, Sackers associate director Andrew Worthington says: “We had the guidance from TPR in springtime. There was separate guidance for trustees and for employers. Many of our clients had already been thinking about the topic of DE&I for some time but, as soon as TPR placed more focus on it, it put it higher on the agenda for almost all clients.
“This would be, for example, in terms of considering how the board is doing from a DE&I perspective, undertaking training and thinking about how they can represent and interact with their membership as a whole.
“The FCA and PRA consultation papers were published recently. Both are consultations and so not in the final form but they have similar themes and are more prescriptive than TPR’s guidance, for example including new rules and guidance on target setting. The FCA and PRA are also now placing more focus on inclusion and not just diversity.
“Some clients are very proactive on this. For others there is more work to do but most realise why it is such an important area and are open to starting the discussion.”
Worthington says larger schemes do have an advantage when it comes to implementing these changes. “The biggest schemes have the larger budgets and more resources, whether that be advisers, their own executives helping to run the scheme as well as potentially more capacity on the trustee board. They will often have taken steps like unconscious bias training. They have frequently looked for the gaps in advance of guidance coming out and reviewed their communications around things like member nominated director election processes to try and get as broad a spectrum of people applying as possible.”
Zedra Governance managing director Kim Nash stresses the importance of cognitive diversity of boards.
She says: “It is not all just about the protected characteristics. Even if I had a range of ages, a range of genders and ethnic backgrounds on the board it doesn’t mean I am going to be making the best decisions.
“The thing for me is cognitive diversity, and people having different skills and experiences is important. That is one area we have been focusing more from a master trust perspective. You want people to think in a different way, you need not just people who think analytically but you need others who are creative.”
There are challenges. The pension industry and the subset of it which includes trustees has not been particularly diverse. They are looking outside say to those who have done value-for-money assessments in other sectors. However TPR knowledge requirements about admin, processes, investment, even ESG are very high so, she says, a balance must be struck in terms of recruitment while the role of the chair in onboarding new board joiners and facilitating dialogue is crucial, she adds.
The focus from a standalone sponsor can vary. But the second part, in terms of achieving the best outcomes for members, is about inclusivity which includes language and engagement. Nash says: “We all know what the standard image for retirement is – two white people walking down the beach with a dog. For some people that is just not the reality of what their retirement is going to look like, nor their stage of life. So we need segmentation, and to make sure images reflect that.”
She adds that it will be interesting to see what TPR do with all the data they are collecting as it is very detailed. Trustee boards are thinking of collecting that in a shortened format.
It may be slightly more straightforward for single employer trusts to draw out trends for a similar workforce in say retail or engineering, and perhaps use this as the basis for future communications or engagement, rather than multiple employee trusts where the membership may be very disparate.
“As a trustee, I want my members to feel confident so they are happy to be in the pension plan. I don’t need them to be investment gurus, but to be confident to stay in the scheme to keep contributing, and then to make the best decisions they can in retirement.
“If we can give them information of relevance in language they understand, hopefully they then don’t make a detrimental step, but you have to support different people in different ways.”
Syndaxi principal Robert Reid, a former diversity champion with the Insurance Institute of London, suggests that inclusion comes first and then diversity will follow.
He says that accessibility of information is the issue for him and points to one initiative he recommended and implemented for a hotel group, where a lot of the staff were from Hungary and Poland, so he ensured the welcome packs were translated into those languages.
He says that such approaches do however require getting the employer onside.
He adds: “There is also a fixation on the numbers when it’s the outcome that matters. Mid-life MOTs help but regular touch points are rare excluding the annual statements. We should be focusing on the person, not the money.”
It is clear that the landscape is shifting with suggestions, guidance and rule changes moving schemes and providers along. This may begin to narrow gaps and improve engagement among a broad range of the membership. But what it has not done, as yet, is catch up with the impact made by auto-enrolment itself.