PensionReforms' summary and comments
Since the 2008 global economic crisis, all connected with the management and supervision of private pension schemes have become more interested in governance issues.  In fact, the UK Pensions Regulator has been surveying pension schemes for the last few years and has recently published the results of its fourth annual survey.  In general, things in the UK seem to be in reasonably good order - at least that's what the schemes themselves report to their regulator (as well they might).

The 2009 survey covers "... trust-based defined contribution (DC), defined benefit (DB) and hybrid schemes with 12 or more members."  The survey was in two waves and was carried out by an independent research firm.  The first wave (early in 2009) involved direct interviews with 544 trustees; the second (in September/October) directly interviewed 251 trustees.  The schemes were chosen to reflect the make-up of all schemes by type and membership.

"The key aim of the governance survey is to assist the regulator in determining the most effective ways of helping trustees to achieve a common objective of improved scheme governance" as required by the Pensions Act 2004.

The key findings were:
"i) Larger schemes tend to be associated with higher levels of governance activity."

ii) Understanding of the clearance process remains low.  From the Pensions Regulator's web site: "'Clearance' is the term used to describe the voluntary process of obtaining a clearance statement from the regulator. A clearance statement gives assurance that, based on the information provided, the regulator will not use its anti-avoidance powers to issue to the applicants either contribution notices or financial support directions in relation to a defined benefit occupational pension scheme and a particular event."

"iii) The Trustee toolkit is now a key source of knowledge for both existing and new trustees"

"iv) Schemes are increasingly confident that they have processes in place to manage conflicts of interest."

"v) Economic uncertainty has had an impact on scheme governance."

"Amongst DB schemes there has been a significant increase in the proportion of schemes with a sub-committee responsible for reviewing the sponsoring employer's  business plans. Amongst medium and smaller DC schemes there has been a fall in those saying that the board regularly reviews investment strategy: this might be as a result of day-to-day pressure on these businesses and the uncertainty within the investment markets.

"vi) Most schemes have a risk register in place but fewer are confident that they have adequate internal controls." 

"vii) There has been limited use of the regulator's communications guidance to date."  

"viii) Where offered, the use of default schemes remains high, with nearly two-thirds of members invested in such a fund." 

This is only of direct relevance to Defined Contribution schemes and the report explains this as follows:
"The high use of the default fund either reflects a fund that suits the majority of members' investment needs and attitude towards risk or perhaps a situation where members are unwilling or unable to make an investment decision."

PensionReforms suspects that the "unwilling or unable" explanation is likely to be the answer.  The result is also affected by the fact that about one third of schemes offer only one option.  Also, that only about half were able to answer the question and the report observed that those answering "believe that over 60% of their scheme members are in the default fund."  It would be interesting to find out why the trustees appeared not to know what the position was.

"ix) Use of the regulator's guidance on communication varies significantly by scheme size.
Two thirds of large schemes have used or considered the guidance issued by the regulator compared to two fifths (42%) of small schemes.  The key reasons for not using the guidance are either a lack of awareness or a lack of time on the trustees' part.  The fact that only a third of schemes have assessed their member  communications in the last year, and only a quarter of schemes would go so far as to  say their board communicates very effectively, suggests that more work needs to be  done by the regulator to address this issue."

PensionReforms thinks the report illustrates the extent to which the UK regulator gets involved in the daily lives of trustees.  It would be interesting to see, first if the schemes' trustees actually do what they say they do.  It would be natural for them to report the best possible explanation of whether they have done what they were supposed to have done.  The only way to discover the full story would be to see directly how they operate.

Next, it would be interesting to assess the costs of this kind or regulatory supervision and whether taxpayers (as potential guarantors for failures that call on the Pension Protection Fund), employers (as underwriters of Defined Benefit schemes) or members receive fair value for this.  PensionReforms suspects that a few high profile cases that crystallised the financial consequences of breaching fiduciary duties might be just as effective.  In PensionReforms' experience, trust law, as explained by the English Law of Equity, is reasonably clear on the detail of what trustees can, should or should not do.  (File size 2.6 MB; 50 pp) 362