Guest post by Kate Hardingham of Ross Trustees
In response to the financial crisis, FTSE-100 companies injected in the following decade £150bn into largely historical defined benefit pension schemes.
For businesses across the entire spectrum, deficit repair payments became the single largest outflow, dwarfing all other expenditure. Yet in spite of this, the liabilities of such schemes continued to grow as gilt yields continued to fall. The battle against growing pension deficits continued through the ensuing Eurozone and Brexit ‘crises’.
On the back of such turbulence, is there really anything new that the Covid-19 crisis can teach us about how to govern our pension schemes, asks Kate Hardingham.
Never in recent history has business continuity planning been so tested. As devastating as preceding market shocks have been, the governance systems that promote and protect the essential chain of command and hierarchy of decision-making were not threatened. Lockdown has challenged all businesses to adapt and to implement new ways of working. Pension scheme boards are no different.
Today in the UK, some £1.7 trillion is under the management of largely lay trustees. These are dedicated individuals, committed to improving the security of the members they represent. Yet they often have a full-time day job and operate without the support of company secretariat and executive support departments which are so critical to corporate governance. It has been over 30 years since the Cadbury Code entrenched the modern-day standards of corporate governance, but no such code exists for pension trustees. Yet.
Have you thought about who runs your pension scheme and how they are coping with the Covid-19 crisis? Have you furloughed pensions, HR or payroll staff upon whom your pension trustees may rely? Have you furloughed your trustees themselves? If not, have you set them up to be able to continue to perform their duties from home during lockdown?
Under the spotlight of pension scheme funding, many larger businesses have chosen to outsource the responsibility for running their scheme to professional trustees, perhaps to a sole corporate trustee or a professional chair. Over the last decade the percentage of pension schemes with a professional trustee has increased significantly.
Two decades ago, almost all pension schemes were run by a Board comprised of management and staff representatives. However, pension fund governance is complex, highly-regulated and a political football. Personal fiduciary liability coupled with civil (and some criminal) sanctions, together with Pensions Regulator’s code of practice and guidance notes, is creating an ever-decreasing pool of potential trustees.
The Pensions Regulator has been keen to extend the professionalisation of trustee boards across the whole range of UK pension schemes, from the large to the small, the well-funded to those with large deficits. It has also sought to ensure that those selling pension trusteeship services are properly trained and resourced, and the industry has responded with an accreditation scheme (exams, CPD, fit and proper person checks all required). Many would say it’s about time.
More recently, the Pensions Regulator has shied away from requiring all schemes to appoint professional trustees, but Covid-19 may put this back on the agenda if the Pensions Regulator feels the lay trustee model is not agile enough.
Good governance should never be reliant on the quality of individuals but on the governance systems supporting those individuals. Covid-19 has put the question of how we run our pension schemes back under the spotlight. It is almost inevitable that the Covid-19 pandemic will hasten the speed of change.
The Covid accelerant
The volatility and velocity of market reaction to Covid-19, and the material impact on many businesses, has left trustees with depleted assets and the impossible task of assessing the short and long-term impact of Covid on businesses which have yet to make that assessment themselves.
Trustee boards, now more so than ever, need to be able to react quickly, coordinate advisers and respond to company challenges and their need for cash. They need to re-prioritise, review, assess and analyse large quantities of information and advice quickly and accurately. The pace of decision-making on matters crucial to the fundamentals of scheme funding and investment has never been faster. Trustee boards who have invested in governance architecture, have robust risk controls in place and strong relationships with their financial directors, board members and advisers are well-placed to manage these challenges and exploit opportunities the markets have presented (and support businesses to do the same).
The Covid-19 challenge has not just been about the decision-making and governance process. The parameters of appropriate trustee behaviour have also been adjusted during this crisis. The Pensions Regulator was quick to ‘encourage’ trustees to be supportive of businesses in financial difficulty, but more recent guidance shows signs that this relaxation will be reined in.
Trustees have had to rapidly flex some of their guiding principles to fit the political and economic climate and will no doubt need to continue to do so. Experienced trustees who are able to stay on top of the developing landscape and who can confidently make proactive risk-based decisions are those that will advance the long-term interests of their schemes.
Covid-19 will highlight those trustees unable to keep up, and the pensions industry will respond. The Pensions Regulator is speaking to trustee boards to assess what lessons the industry can learn and it is likely this will result in the proposed trustee standards being strengthened.
Post-Covid-19, trustees will need to be agile to gear up to pressing timetables, making decisions quickly without compromising the strength and quality of those decisions. They will need confidence to act, not mistaking caution for inaction.
This will demand a strong knowledge of the business and the risks and threats faced. They will need to support finance directors in exploiting these risks and opportunities. Trustees will also need to invest in their governance architecture and secretariat function, but also need to promote diversity of background, race, gender and thought.
It is unlikely that the Pensions Regulator will force employers to appoint professional trustees to all pension schemes in the near future. However, regardless of its position, sponsors should be looking to their trustees and challenging them to rise to the difficulties Covid-19 has presented, and to those a post-Covid-19 world will present.
Kate Hardingham is a Trustee Director at Ross Trustees and acts as an independent trustee for a wide range of pension schemes.