Trustees warn single code will be significant resource drain

The watchdog’s draft new combined code, published in March 2021, contains new governance expectations for pension schemes that are due to come into force later this year. 

Willis Towers Watson’s latest ’Trustee DB governance DB survey’ reveals that many defined benefit pension scheme professionals and trustees are concerned about their ability to meet the requirements of the new code. 

This has created for trustees a potentially huge source of additional work at a time when we’re already struggling with the workload

Richard Butcher, PTL

Trustees worried about impact on workload

When asked what trend or change would lead to major changes in their scheme’s governance processes in the next two years, 65 per cent of respondents identified the new single code, followed by climate change impact with 47 per cent, and by risk transfer options such as buy-ins at 43 per cent.

Just over 60 per cent of respondents believe the new code will take a lot of trustees’ time and resources to become compliant, while just 22 per cent think it will add value to their scheme’s governance.

A quarter of schemes have undertaken training on the new single code’s requirements, and just 13 per cent have undertaken a gap analysis to discover where their scheme governance is lacking relative to the code’s requirements, with four in five (79 per cent) still planning or considering a gap analysis.

The new document brings together 10 of the 15 existing codes of practice — but also includes new elements such as climate change and stewardship, greater content on cyber controls, and maintenance of IT systems. 

The single code will also include governance from the  Institutions for Occupational Retirement Provision directive, such as trustees’ duties to carry out an annual own risk assessment, appoint a risk management function, and implement additional formal policies.

Despite the concerns of trustees over the time and resources involved, WTW found that among schemes that have undertaken a gap analysis so far, many have realised that their current governance framework is closer to the level required by the code than they first thought. 

Jenny Gibbons, pensions governance lead at WTW, said: “There is more flexibility in the new code’s requirements than many think, but at the moment it’s a fear of the unknown that seems to be driving anxiety around it. 

“That’s why we would urge all schemes to identify their governance strengths and weaknesses sooner rather than later, so they know the length of their ‘to-do’ list and can plan in good time before the new code comes into effect.”

It comes as trustees are facing increasing demands of scheme governance and additional regulatory requirements, with the single code being the latest burden. 

Following criticism over its draft single code, TPR said it was planning to change it substantially,  but the industry is still waiting for the regulator to reveal the final version.

Richard Butcher, managing director at PTL, said: “The reason that is significant is because we’re all trying to second guess what’s going to be in the new code. That means in practice that it’s quite difficult to plan for because you don’t know whether you need, for example, a remuneration policy or not.”

Butcher is concerned this uncertainty has not only created extra work but also a climate of fear among fiduciaries, where trustees are concerned that they might not be compliant, and they cannot know whether they will or will not be because they do not have a code.

He warned that this has resulted in a “cottage industry for some providers to generate revenue”.

“Others are trying to get their clients ahead of the game, but some of them are just trying to do it to generate revenue,” he added. 

“This has created for trustees a potentially huge source of additional work at a time when we’re already struggling with the workload because of [environmental, social and governance / Task Force on Climate-related Financial Disclosures] reporting, annual statements, as well as the day job of trying to pay people their benefits.”

There is widespread support for the basic objective to simplify a disparate collection of codes of practice, to try to bring them together into one reference place, simplify them and make them more principles based. 

“That strikes me as being a good idea, and the sooner we get there the better. I just wish [the regulator would] get on and do it,” Butcher said.

But he cautioned that there needs to be some proportionality because “we do not want to just deluge trustees with unnecessary work”, he added.

It’s becoming harder to find member-nominated trustees

According to WTW’s research, trustee board chairs already spend an average of 53 hours a year on governance-related activity, subcommittee chairs spend 47 hours, and regular trustees spend an average of 37 hours. The largest schemes are likely to spend significantly more time on governance activities.

Marcus Hurd, partner and managing director at Ndapt, argued that it is causing an issue where schemes have a variety of different trustees and there is not good governance and decision-making in progress already.

“For those schemes, it is hard to implement all the changes they need to get there. So, in a perverse kind of way, it is those schemes that are struggling already that are going to have the biggest problem here,” Hurd said.

Six in 10 respondents think it is becoming harder to find members to act as trustees, while more than half believe member trustees should be remunerated for their time

Angela Winchester, trustee director at 20-20 Trustees, agreed with the pensions watchdog’s increased focus on risk management.

“DB schemes have been traditionally focused on integrated risk management, but there is a whole other world of risks out there that I don’t think DB schemes have traditionally necessarily paid as much attention to,” she said. 

“This combined code is just pulling everyone up to possibly the level of the master trust code of practice and the [collective defined contribution] code of practice, which are much more heavy duty about doing risk management — the sort of thing that I would expect to see in corporations.”

However, Winchester said there is a lack of real guidance as to how to do this in practice.

The knock-on effect is that the expanding role of the trustee is also making it harder to fill vacant trustee roles. Nearly two-thirds (62 per cent) of those surveyed said it is becoming harder to find members to act as trustees.

“With the more work to do, the more it costs to have a trustee and also risks losing your member-nominated trustees — which is a real shame because they are the ones that maintain that link directly into the membership, which is quite important in terms of getting feedback,” Winchester added. 

Remuneration for MNTs?

In WTW’s research, more than half (53 per cent) of respondents thought that lay trustees should be paid to compensate for the increasing time commitment. 

Two-thirds of trustee boards have at least one independent professional trustee, which is expected to increase to nearly three-quarters of boards in the next couple of years.

Gibbons said that remunerating more trustees for the time they spend on their duties could be “one of the most effective ways to open up opportunities to a broader, and larger, base of applicants who would not otherwise be able to make the commitment” and could benefit governance in the long-term.

The challenge is that once trustees are remunerated for a position, the levels of expectation of them increase.

Hurd said that while this does not necessarily mean you need to be a pensions expert and have all the answers, “if you are going to be remunerated for a role, you must demonstrate a value add into the process”. 

He added: “Therefore, a higher bar needs to be set for those appointments. But this is in an industry that is already struggling to attract member-nominated trustees to a number of these roles.”