FOCUS ON GOOD GOVERNANCE
Rachika Cooray
Partner
Having a defined and robust governance process means you can be sure you're meeting your trustee obligations and carrying out your role efficiently and effectively. But it also puts your scheme ahead of the pack when it comes to dealing with the unexpected and taking advantage of market opportunities. Done right, good governance creates a foundation for making robust and timely decisions and achieving better outcomes for your members.
In our survey, we asked respondents to tell us how often they review various aspects of scheme governance. The results were very much in line with our expectations. Some areas, such as risk management and trustee training needs are reviewed frequently, sometimes at every meeting, whilst other areas, such as board effectiveness and adviser performance, are more commonly reviewed annually. There are also some areas which many trustee board are yet to address, such as considering diveristy and inclusion and having a written remuneration policy, the latter of which will be required as part of the Regulator's Single Code of Practice.
In practice we recommend all boards consider what is the most effective timing for them and have a clear business plan to make sure this is done – this can all be considered as part of your assessment on how to evolve your governance in the new environment.
How often do you review your governance processes?
“Good governance isn’t about ticking a box or having a piece of paper to say you’ve “done it”. It’s an ongoing process that develops and strengthens over time.”
Rachika Cooray Partner
Top tips for “business different”
The Covid-19 pandemic tested the resilience of trustee boards and their ability to maintain “business as usual” during extraordinary circumstances. Those trustee boards with robust governance frameworks adapted quickly, whilst some others struggled initially with moving to the virtual world.
"The great news is, 95% of the schemes in our survey stated that the pandemic either had a positive impact or made no change to their approach to governance and decision making."
With Covid-19 safety restrictions being lifted this summer, many trustee boards are considering what the future model for meetings and decision making might look like. Click here to see our top governance tips for achieving success in a “business different” world.
Behavioural Insights Hub
The Pensions Regulator has made it clear that it sees diversity and inclusion as key to effective decision making. For more ideas on how to improve diversity and inclusion on your board, have a look at our new Behavioural Insights Hub. Here you'll also find out about how we can help you better understand behavioural biases and support you in making robust decisions and achieving better outcomes for your members.
One Code to rule them all
The Pensions Regulator’s (‘TPR’) new single Code of Practice (the ‘Code’) is expected to be implemented towards the end of 2021 or early 2022. It will consolidate 10 of the 15 existing Codes into 51 new web-based modules. The Code will also include the requirements of the second European Pensions Directive (commonly known as IORP II) as reflected in the 2018 Governance Regulations.
Although the new Code is based largely on existing Codes of Practice, it does introduce new requirements for both DB and DC schemes. In particular, trustees will need to have in place an effective system of governance (or “ESOG”) and complete an own risk assessment (or “ORA”) within one year of the code of practice being implemented – find out more here.
We welcome the overall aim of the Code and encourage trustee boards to embrace the new requirements proportionately and in a way that enhances how they operate.
What you can do to prepare for the new Code
- Familiarise yourself with the draft Code and The Pensions Regulator's expectations.
- Consider whether you would benefit from receiving training on the new Code.
- Decide who will undertake the new Functions introduced by the Code, including the risk management function.
- Review your scheme’s governance frameworks against the effective system of governance (‘ESOG’) requirements so that you can identify any gaps that might need to be addressed.
- Consider how you will resource these additional governance requirements and who will carry out your first own risk assessment (‘ORA’).
“The ORA is a substantial process and the governing body may need to expand its risk assessments to fulfil our expectations”
– The Pensions Regulator
Expected impact of ESOG
Our survey shows that the majority of respondents are expecting at least some impact from the new requirements.
PREPARE FOR THE PENSION SCHEMES ACT 2021
The Pensions Schemes Act 2021 included a number of key things as you can see from our hub where we cover the following key areas:
1. Regulator powers
The new Regulator powers do shift the balance towards trustees in various negotiating positions. This includes protecting against changes in the covenant due to corporate actions but could also include valuation negotiations. However, overall many of our survey responses felt overall for their schemes there would be little impact.
How do you expect the Regulator's new powers (including criminal offences) under the Pension Schemes Act 2021 to impact the operation of your pension scheme?
0 = No real impact, 10 = Significant impact
2. Funding
The Pensions Schemes Act 2021 also laid the basis for the Pensions Regulator’s new regime on funding and investment. Although there is little real progress to report since our last report, an increasing number of our survey respondents thought, when it is finally in force, they would be using the Bespoke approach rather than the Fast-Track approach.
Under the Pensions Regulator’s proposed changes to the DB funding code as set out in its consultation, do you expect your valuations to follow Fast Track or Bespoke
Comparing our 2020 survey responses to our 2021 responses there has been a 15% reduction in the number of schemes who believe it is too early to tell, with a large increase in the percentage of schemes who believe they will have to go down the Bespoke route. If your scheme is one of the 35% that is unsure as to which they might be then speak to your LCP contact about LCP’s Fast Track Dashboard for an insight as to how your scheme currently stacks up against our expectation of the new regime and how tweaks to your current strategy could help you achieve fast track.
Single equivalent discount rate above gilts
The chart above shows the technical provisions discount rate converted into a single premium above gilts for LCP Sonar Schemes. For example, for a scheme using a pre/post model with a pre retirement premium of 0.5% pa and a post retirement discount rate premium of 0% pa then their single equivalent discount rate would be somewhere between gilts flat and gilts+0.5%, with the single premium being closer to gilts flat the more mature the scheme.
For almost 35% of LCP Sonar schemes the current single equivalent premium is less than 0.50%, the level currently indicated by the Regulator as being the upper premium that they would expect to be reached by significant maturity. Therefore, we would expect these schemes to satisfy the Fast Track criteria in terms of discount rate.
For the schemes currently using a single premium of more than 0.5% pa above gilts this doesn’t necessarily mean that they won’t be able to meet the Fast Track discount rate requirements. Schemes are expected to be able to take greater investment risk in the years prior to reaching significant maturity provided that the level of this risk is proportionate given the covenant assessment and reduces over time. For some of the schemes their current technical provisions investment model will meet these requirements, however, for others that assume a slower pace or no de-risking, adopting a Fast Track compliant discount rate could result in a significant increase to the technical provisions.
We await a draft Code of Practice from the Regulator around the turn of the year which will give long-awaited further colour on what the new regime will look like, but at present there remain a number of areas to address as set out in our on-point paper, “Fast Track to Problems? Why TPR’s new DB funding code needs to be flexible” and “10 unanswered questions about the new DB funding regime”.
3. Action on climate change
The Pension Schemes Act brings in specific requirements for larger schemes to enhance their climate governance and reporting via the TCFD requirements. However, it also makes good sense to consider these risks, which could jeopardize the payment of member benefits. To read more about why climate risk is important, what you must consider and what you can do, head to LCP’s Climate Centre.
It is therefore pleasing to see that a large proportion of our survey respondents wish to improve their approach to climate risk management, rather than following a minimum compliance route, although very few want to be market leading.
What is your approach to requirements around climate change?
We view climate regulation as an accelerating force, not least driven by the fact that research indicates current Government commitments are not expected to be enough to achieve the Paris Agreement goals. This leaves a real risk pension schemes are left behind unless they make significant changes. Early action is the most effective way to ensure the financial implications of climate change don’t throw your scheme off course.
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