With schemes having faced a heavy burden of regulatory change over recent years, combined with the introduction of auto-enrolment, many trustees may have had less time than they desired to consider whether their governance arrangements remain fit for purpose. However, with the prospect of a policy lull while the government focuses on Brexit-related issues, now could be an opportune time for trustee boards to reassess whether their composition and organisation is best placed to meet the evolving interests of their members.
In some cases, especially where hybrid schemes are concerned, a trustee board may have originally been set up at a time when DC pensions were in their infancy and will have subsequently focused on the interests of final salary scheme members. Therefore many trustees will naturally have greater experience dealing with DB issues, such as managing a scheme’s deficit and liabilities.
Boards will need to be sensitive to the tensions that individuals face, such as concerns over the value of their pension pot, particularly as retirement approaches.
However, as the Pensions Regulator illustrated in its DC Trust report, total DC membership has now overtaken that of DB schemes,1 and boards may wish to ask themselves if a DC scheme requires a different skill set. With individual DC members bearing the risk for their future financial security rather than the company, boards will need to be sensitive to the tensions that individuals face, such as concerns over the value of their pension pot, particularly as retirement approaches.
Creating a dynamic board
But what does a good trustee board look like in practice? The Pensions Regulator guidance states that trustee boards should look for balance and diversity in a range of areas, which include the type of trustees (whether they are professional, or nominated by the employer or member), trustees’ experience and skills, as well as their demographics (such as age, sex and ethnicity).
As far as the size of a board is concerned, various factors will obviously be relevant, such as the size of the pension fund and the experience of the trustees. With too few trustees, there may be a danger of overreliance on one or two individuals with significant financial or pensions experience (whom member-nominated trustees may find difficult to challenge), or on consultants. On the other hand, if there are too many trustees there could be the potential for them to become victims of ‘group think’ or complacency. The chair of the trustee board is obviously a pivotal role, and will require the ability to take leadership, create the right trustee ‘team’ and think outside the box with the conviction and vision to plan for the long term.
Trustees could find it useful to have the voice of a young member of the scheme on the board to ensure they remain connected to the issues facing this section of the member base.
Connecting with the younger generation
Ultimately, each scheme’s specific circumstances will need to be taken into account, but schemes will want to look at how their boards can best act in the interests of their beneficiaries. One aspect schemes may wish to consider is how their boards can address the different priorities of cohorts such as the ‘millennial’ generation. This growing part of the workforce faces a unique set of challenges, including lower salaries than previous generations, heavy student debt, soaring house prices and sky-high rents. It is therefore understandable why many may view saving for a retirement pension not only as challenging but futile. With low engagement and financial literacy among this age group, trustees could find it useful to have the voice of a young member of the scheme on the board to ensure they remain connected to the issues facing this section of the member base. Moreover, boards may want to question how actively they are addressing environmental, social and governance (ESG) issues, such as climate change, particularly if these are something that a scheme’s membership has strong feelings about.
Assessing the effectiveness of a board and its governance arrangements is not a straightforward task, as trustees already have a multitude of factors to consider. However, being open to gaining fresh perspectives can help boards as they seek to identify the long-term risks facing scheme members and their investments. While it is hard to define precisely what a ‘good’ trustee board looks like – and moving away from a traditional composition could feel like stepping into the unknown – a well-balanced board with committed and engaged trustees should be well placed to protect the interests of a scheme’s members.
Newton defined contribution investments
This is a financial promotion. This document is for professional investors only. These opinions should not be construed as investment or any other advice and are subject to change. This document is for information purposes only. Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority. T6330 12/17.