The Pensions Regulator (TPR) has raised concerns about potential conflicts of interest within professional trustee companies that offer additional services to pension schemes.
It also plans to scrutinise profit and remuneration models and whether these could affect decision-making, such as by compromising services to reduce costs.
The regulator will also explore sole trustee arrangements to better understand the reasons for appointments and what internal controls are in place.
TPR announced today (2 April) that it will begin formally regulating professional trustee companies this summer as it seeks to understand the growing influence of the sector on pension schemes.
Last year, the regulator deemed professional trustee firms “systemically important” due to their rapid growth and influence. Following a period of engagement with 11 of the biggest firms, the regulator said it plans to introduce a “framework for oversight” of such companies.
In a market oversight report, published today, it flagged potential issues with professional trustee firms’ in-house advisers.
TPR said it would investigate “whether there is a risk that the presence of in-house advisers could lead to compromised decision-making or compromised advice to schemes”.
It explained: “For example, whether there is a reluctance from professional trustees to properly scrutinise advice from, or to pursue errors by, in-house advisers.
“We also have concerns over whether in-house advisers could face issues with indemnity insurance, for example coverage limitations, conflicts of interests and concerns around internal investigations.”
Five areas of scrutiny for professional trustees
In its report, the regulator set out five main areas of focus. As well as sole trusteeship, remuneration models and in-house advisers, it plans to scrutinise the relationships between professional trustee firms and pension scheme sponsors.
It also wants to investigate how decisions are made and who is responsible for them.
TPR stated that it wanted to “probe firms’ internal controls” to make sure that they did not engage in “inappropriate delegation”.
It emphasised that it wanted to ensure appropriate levels of accountability, transparency and support for pension scheme clients.
“Where we identify material risks, and firms do not meet our expectations, we will also consider how we might make use of our existing powers to mitigate those risks,” TPR said.
A summer of engagement and improvement
Over the summer, TPR will set up “targeted, expert-to-expert engagement” with some trustee firms, aiming to expand to all such companies by the end of the year. It aims to assess these risks in greater detail and work with firms to improve standards and mitigate issues.
“Through this work we also want to highlight good practice and raise standards across the market through regulatory dialogue and external communications,” TPR said. “We hope this will better inform employers and trustees in choosing their professional trustee provision.”
The regulator’s move follows a period of rapid growth in the professional trustee space, with firms hiring and expanding their reach and influence.
More than half of UK pension schemes are now thought to have a professional trustee on their board or be using a sole trustee model, according to multiple industry surveys.
However, provision of these services is dominated by a small number of large and growing companies, with the 10 biggest providers estimated to have influence over more than £1trn in assets.
Speaking at the Trades Union Congress’s Pensions Conference in London, Nausicaa Delfas, TPR’s chief executive, said the move formed part of the regulator’s “risk-based and outcome-focused approach to regulation”.
“The professional trustee industry has experienced significant growth over the last few years, with more than half of UK schemes using a professional or sole trustee,” she said. “Between them, just 10 firms govern more than a trillion pounds of savers’ retirement income.”
