in this edition of Technical Comment, Jelf's Mark Winstanley gives some pointers on getting the right mix of people and skills that is crucial to the smooth running of a pension scheme.
So if governance is about steering the pension scheme in the right direction it is essential we have the right people to steer it.
Action points
Establish your governance committee with member-nominated committee members.
Be clear on roles and responsibilities.
Provide training – both initially and ongoing.
Prior to the Maxwell affair and the resulting Pensions Act 1995, most trustee bodies were comprised entirely of representatives chosen by the sponsoring employer – and generally this meant senior individuals in the business.
However, trustee bodies are now required to have at least a third of trustees member-nominated.
Meanwhile, most contract-based schemes have seen little in the way of governance, and the main reason employers did not want to operate occupational pension schemes was due to the increased governance required of trustee bodies.
Where governance committees do exist in relation to contract-based schemes, most just have senior employer representatives, or if there are some non-senior representatives they are typically still chosen by senior employees.
However, the lack of governance within contract-based schemes is slowly but surely changing. The recent Office of Fair Trading report, issued in October 2013, had five key recommendations, one of which was to improve the governance of workplace pension schemes, in particular in relation to contract-based schemes.
This will result in the establishment of independent governance committees by the pension providers in the market. But what about the impact on employer-run governance committees?
The Pensions Regulator now appears to be redirecting its focus away from defined benefit schemes and looking more closely at defined contribution. Just last month, Code of Practice 13 – which many will say is lucky for members – was introduced for occupational DC schemes.
I would personally encourage employers running contract-based schemes to read and learn from this material. All this guidance is well and good, but going back to my initial point, one of the most important factors in governance is who is on the committee.
Features of effective governance
To run an effective governance body you need a number of key features:
It must act in the interests of the beneficiaries and not the employer.
It needs to understand its responsibilities and the powers it has to make changes.
It should have the right balance of skills and experience.
It is therefore important to have a diverse mix of representatives, both from senior management within the employer and also from within the workforce.
Having a more diverse group of committee members will provide a differing view on a number of factors:
Communication – the quality of member communication and how easy it is for everyone to understand.
Administration – the help and guidance members receive from the provider’s helpdesk and online tools.
Investment – whether the default investment strategy is understood by members.
Retirement – whether members understand what their options are at retirement.
What senior representatives might think is happening is not necessarily what is happening in practice. In addition, not everyone has the skills needed.
A finance director might be expected to have the skills around the composition of the default investment strategy, but it might be someone from the marketing or sales department that has the skills around how to communicate the strategy.
When it comes to selecting members, why not have member-nominated governance committee members? The process can be similar to the way MNTs are selected, but to ensure you have employees who want to be on the committee you need to provide clear guidance on what is expected of them.
This could include the number of meetings they are required to attend and confirmation that they are allowed time off work. You should also provide training, both initially and ongoing. The best governance committees may have annual professional development targets for their members.
You also need to 'sell' the value of the role, both in terms of how it will develop an individual and also the benefit it will give to the wider workforce.
Finally, it is essential you have the right chair to oversee the committee – someone who is willing to be challenged and whom committee members are willing to challenge, while ensuring the focus of the committee is not lost.
If you want to steer your scheme in the right direction, it is about having the right team.
Mark Winstanley is corporate pensions director at Jelf Employee Benefits
