How mixing the trustee board make-up can boost performance

There are certain exemptions, for example where all trustees are independent. Subject to this it is usually up to employers to decide who will be a trustee under a provision in the scheme rules.  

If there is no such provision, then the power is retained by the trustees.

There is guidance from the Pensions Regulator on how trustees should decide on arrangements to meet the statutory requirements, but this focuses on the different membership categories, rather than the diversity of individuals within the membership. 

Trustees are encouraged to adopt a principles-based approach so the arrangements are proportionate, fair and transparent.

Employers have no such constraints but are subject to the general trust law obligation of good faith when exercising their powers. 

Some employers are, however, applying voluntary corporate governance principles on diversity to their pension scheme boards.

The usual suspects

The 2014 National Association of Pension Funds survey reveals a gradual change in the membership profile of trustee boards.

There has been an increase in the number of member-nominated and independent trustees – 42 per cent and 55 per cent respectively – but boards are still lacking diversity in terms of age, gender and ethnicity. 

The continued dominance of men, who account for 86 per cent of trustees, is particularly striking.

Gordons’ own recent qualitative research entitled ‘Independent pension scheme trustees: trends for the future’, indicates a discernible shift towards greater professionalisation, with increasing numbers of trustee boards wholly independent of the membership and the employer. 

Men aged over 55 years drawn from the legal and actuarial professions are still in a significant majority, accounting for 62 per cent of trustees, although there are signs this is changing.

Diversity is desirable

There is considerable evidence that diverse boards are more effective at decision-making. 

The 2011 Davies review concluded that “stock market growth is most likely to occur where there is a higher proportion of women in senior management teams”.  

A recent report by Finnish MEP Sirpa Pietikäinen to the European Parliament’s select committee on gender equality, highlighted the importance of more balanced boards of pensions institutions to ensure there is awareness of gender issues in pension provision. 

In the EU, on average, women receive 39 per cent less pension than men. Understanding these issues is a prerequisite to reducing this gap.

The 30% Club, which promotes a voluntary approach to improving governance of the FTSE 100, aims to see 30 per cent women on those boards by the end of 2015.

Diversity is now recognised by many fund managers as a business issue and an ingredient of improved, long-term corporate performance. 

Employees are likely to value their employer’s pension arrangement and be more engaged if the trustee board reflects the scheme membership.

Time for change

Given that the majority of trustees are selected by employers, strong leadership on company boards is needed, with a deliberate policy to appoint trustees drawn from a wider pool of candidates. 

As with the corporate governance code, companies should be encouraged to comply or explain. 

The policy should look to broaden the sources for referrals and have a limit on terms of office. This should help a move away from the usual suspects.

Ensuring a pipeline of candidates is likely to require good communication and an investment in skills training. 

Gordons’ research into independent trustees identified a soft skills gap. Mentoring by experienced trustees could also help allay the fears and dispel the misconceptions of prospective candidates.

There will be a limit to the number of trustees that can sit on a board and some members may be reluctant to make the commitment.

However, such individuals could make a contribution to the debate through a consultative panel. 

Terry Saeedi is a pensions partner at Gordons