Automatic enrolment has been a huge success, but it’s placed the trustees of defined contribution, occupational pension schemes (DC OPS) under significant pressure. If we just look at the numbers; the trustees of DC OPS look after the financial futures of 22.4 million members, they’re responsible for the investment of more than £146 billion in assets, and ensure the timely collection of more than £20 billion in contributions each year..
Many members within DC OPS are looked after by the trustees of the 37 authorised master trusts in the UK. They have a combined membership of 16.6 million members and assets of £38.5 billion, despite many of them being in existence for a relatively short period of time.
This phenomenal growth necessitated the introduction of the master trust authorisation process. Master trust trustees had to satisfy The Pensions Regulator (TPR) that their schemes were well governed through a process so onerous that around 50 schemes chose not to complete the journey. Given the number of members saving in their schemes, master trusts are also subject to an ongoing supervisory regime requiring an annual report and external opinion on governance activity and controls. Trustees of master trusts are also expected to be up to date with all regulatory requirements, with the pressure of possible TPR sanction and reputational damage sitting alongside their fiduciary duty to scheme members.
It’s no surprise that that the board of Aviva Master Trust is made up of professional trustees, with a variety of specialisms, and years of experience.
It’s also no surprise that the trustees of master trusts require significant levels of support, both from within the sponsoring organisation, and from independent experts. Multiple law firms, investment advisers and auditors are required alongside a dedicated in-house team to ensure that the trustees of Aviva Master Trust have all the information they need, to make the right decisions, in the interests of their members.
There are few who would argue against multi-employer pension schemes, whether that’s master trusts or group personal pensions (GPPs) dominating in terms of the future of workplace pensions. But what of the past? Not everyone in a DC pension is in a GPP or a master trust.
Single employer OPS may be dwarfed by master trusts in terms of the number of members, but they still look after 5.8 million members, that’s a shade more than the population of Denmark! In terms of assets they look after £107.5bn on behalf of their members, close to three times the amountheld in master trusts. Given these numbers the DWP and TPR are keen to ensure that some of the rigour applied to master trusts, and to group personal pensions through the FCA and PRA, is encouraged in single employer OPS.
It’s worth saying that many single employer OPS are well run and offer great value pension schemes for their members, but we have to acknowledge that it’s not true of every scheme. TPR’s DC Survey data shows that many trustees operating smaller schemes, are failing to satisfy one or more key governance requirements. This might be putting members’ savings at risk as a result of poor risk management, investment decision making or overall value for money. Generally, the larger the scheme the more resource is available to trustees and the better run they are, and better run schemes tend to deliver better retirement outcomes for their members.
So what’s on the “to do list” for trustees? The first thing has to be the Regulator’s single code of practice. While some of this is a more concise expression of the Regulator’s expectations of trustees there are new requirements that have been introduced within its 149 pages.
One of the key additions is the requirement for trustees to operate an effective system of governance (ESOG), that means documenting their processes, as well as operating them. Schemes with over 100 members also have to carry out an annual own risk assessment (ORA) of their governance i.e. how well are their governance processes working, and how are they effectively managing potential risks.
The effective date of the code isn’t known at the moment. The ORA is due within 12 months of the single code coming into force, according to the code, however the regulations give trustees more time to comply. Something we’re sure will be clarified. What’s already clear is that the ORA will be a “substantial process” and a trustee board “may need to expand its risk assessments to fulfil (TPR) expectations”. Few schemes will need to follow the lead of GPPs and master trusts and produce a TCFD (Task Force for Climate-related Financial Disclosures) report, but all trustees need to ensure they’re taking the full range of investment risks, including risks associated with climate change into account. Trustees need to document how they’re managing investment risks within their Statement of Investment Principles and evidence what they’ve done in their Implementation Statement. This isn’t tick box compliance, it’s an essential activity to protect member returns as we approach what has the potential to become a new industrial revolution.
The third requirement is perhaps a distillation of the governance carried out by trustees, the annual assessment of value for members. We’re expecting final regulations to be published soon, but if implemented as proposed, the trustees of all schemes with less than £100million in assets will be required to carry out an annual comparison of the value offered by their pension scheme, against three large schemes. These can be any scheme type, including GPPs and master trusts. The trustees need to include at least one scheme they expect would accept them should they decide to wind up their own scheme. The assessment is based on charges as well as net returns, but also includes an assessment of governance activity against a range of expectations. Trustees are going to need to be honest in their assessment of whether they can pass the test.
Few trustee boards will have the range of in-house expertise, and the time, to satisfy this ever-expanding workload on their own. Most will require advice from a range of advisers and corporate pension advisers will be key.
Investment advice is an obvious area where trustees may need help. Pensions are long-term investments and key risks to returns, such as the risk of climate change and the transition to a low carbon economy must be properly managed, especially in the default solution. Some trustees may be looking for made-to- measure investment strategies to manage their members’ money, while a view on the ready- made solutions available in the market might be equally useful to others.
Some advisers may be able to offer trustees guidance on how to build an ESOG, or carry out an ORA, many will be able to offer invaluable advice when it comes to carrying out the assessment of value for members. No one is better placed to offer trustees an informed and impartial view of how a pension scheme compares with the alternatives in the market than a corporate pensions adviser.
We shouldn’t shy away from the possibility that a number of trustees will conclude that they don’t have the resource to meet TPR’s expectations of them, or that another scheme might be able to offer their scheme members better value. This is another area where advisers can demonstrate their value to both trustees and employers. The transfer of members and assets from an occupational pension scheme can throw up a multitude of challenges based around existing assets, scheme documentation, guarantees and protections, none of which will be new to an experienced adviser or provider. Those trustees who carry out an initial assessment early may find they are in pole position to call on the adviser and provider resource they need, to ensure a smooth transition to the most appropriate solution for their members.
The decisions about whether to maintain an existing scheme or to switch to a GPP, a buy-out plan, or a master trust may be shaped by scheme specific challenges, but at the end of the day the new regulations are all about delivering the best pension scheme for the members. An employee benefit that is appreciated, and which maximises employees’ opportunities to hit their retirement goals.
It’s about delivering what corporate advisers deliver for their clients every day of the week.